Is Mr. Market pricing in too many rate cuts?
September 24, 2025
As the balance of risks flipped to the labor side of the Federal Reserve’s dual mandate, the market has sharply repriced the Fed’s policy rate outlook. The market implied terminal rate sits just below 3% (as of 9/12/2025) as the market has priced in six interest rate cuts by the end of 2026.* “With the FOMC (Federal Open Market Committee) bifurcated between labor doves and inflation hawks, there’s scope for markets to be disappointed in the near term. But less cuts now likely translates to more cuts later as labor markets continue to soften,” said Garrett Melson.
- The Secured Overnight Finance Rate (SOFR) implied terminal rate measures market expectations for the future path of SOFR, providing insight into expected interest rate changes over time.
- While the Fed resumed its easing cycle at the September meeting with a 25 basis point rate cut to a 4% to 4.25% range, Melson believes the path of future cuts remains very much data dependent as the Fed’s reaction function is far more reactive than it was at this time last year.
- For now, investor risk appetite has been bolstered by the potential for more rate cuts by the Fed as weaker economic data rolls in.
* Source: Bloomberg
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