By John Lau
January 31, 2025 – On Wednesday, the Fed made no change to interest rates, as expected. Turning to Powell’s press conference, I do think the Fed used the meeting to convey that unless inflation declines further or growth rolls over, rates aren’t declining anytime soon. From a market standpoint, the net impact of the Fed meeting isn’t going to be a new negative because markets had largely priced in a Fed that wasn’t cutting anytime soon and the Fed largely reiterated that on Wednesday. However, it did remove a potentially positive catalyst if the Fed was more dovish. As such, while the decision won’t cause a pullback by itself it does remove a potential tailwind from markets.
So, What Would Cause the Fed to Cut Rates Again?
The FOMC did not cut interest rates on Wednesday, as expected, and signaled that while it wasn’t ready to announce a pause, it wanted to take a “wait-and-see” approach to any further cuts. And because the expectation for continued rate cuts is important support for this bull market, I wanted to identify what I see as the events that would get the Fed back to cutting rates and reassuring investors that they haven’t paused.
Importantly, while the financial media is likely to link Trump’s tariffs and economic policies to Fed decisions, it is important to realize the relationship between the two isn’t necessarily direct. For instance, if Trump enacts universal tariffs, it doesn’t mean the Fed won’t cut rates. Similarly, whether the Republicans pass an extension of the Tax Cuts and Jobs Act (TCJA) or not won’t automatically make the Fed less or more dovish. Instead, the two economic factors that are more pertinent to the Fed rate cuts are inflation and economic growth. Now to be sure, tariffs and tax cuts can impact economic growth, so they do matter to the Fed. But that impact takes time and it’s an unknown, so don’t expect the Fed to automatically react to any tariff or tax policy, and importantly, tariffs and tax cuts will not eliminate the chances of another rate cut unless they result in 1) higher inflation or 2) slower growth. Given that, what would cause the Fed to cut rates?
Catalyst 1: Core PCE Price Index moves closer to 2.0% y/y. Right now, the main thing preventing the Fed from cutting rates is inflation, as it’s stopped declining towards the Fed’s 2.0% goal. According to the U.S. Bureau of Economic Analysis, the personal consumption expenditures, or PCE (the Fed’s preferred inflation measure), accelerated slightly in December, as price growth remains stubbornly above the central bank’s goal. The core PCE index, which excludes volatile food and energy components, was up 0.2% in December and up 2.8% year over year. It was the third straight month of a 2.8% year-over-year increase. Unless PCE continues to decline, the Fed will not be in any hurry to cut rates anytime soon.
Catalyst 2: Unemployment rate hits a new high. Most Fed officials have said they remain confident that inflation will return to their 2.0% target, but because economic growth is so solid they can essentially afford to wait on cuts to be sure inflation is still declining. However, if the unemployment rate were to start to rise and break above the 4.3% high from 2024 (that was an initial high that was revised lower) and head towards, say, 4.5%, that would likely be viewed as real deterioration in the labor market. And like we saw in August of last year, this would probably cause a growth scare and a dovish Fed pivot.
Bottom line, the Fed needs further progress on inflation (that re-instills more confidence in hitting the 2% target) or a sudden growth scare to again cut rates. Until one of those two things happens, it’s likely the Fed is on hold (and that is a headwind on stocks).
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere. A2225
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
What Would Cause the Fed to Cut Rates Again?
By John Lau
January 31, 2025 – On Wednesday, the Fed made no change to interest rates, as expected. Turning to Powell’s press conference, I do think the Fed used the meeting to convey that unless inflation declines further or growth rolls over, rates aren’t declining anytime soon. From a market standpoint, the net impact of the Fed meeting isn’t going to be a new negative because markets had largely priced in a Fed that wasn’t cutting anytime soon and the Fed largely reiterated that on Wednesday. However, it did remove a potentially positive catalyst if the Fed was more dovish. As such, while the decision won’t cause a pullback by itself it does remove a potential tailwind from markets.
So, What Would Cause the Fed to Cut Rates Again?
The FOMC did not cut interest rates on Wednesday, as expected, and signaled that while it wasn’t ready to announce a pause, it wanted to take a “wait-and-see” approach to any further cuts. And because the expectation for continued rate cuts is important support for this bull market, I wanted to identify what I see as the events that would get the Fed back to cutting rates and reassuring investors that they haven’t paused.
Importantly, while the financial media is likely to link Trump’s tariffs and economic policies to Fed decisions, it is important to realize the relationship between the two isn’t necessarily direct. For instance, if Trump enacts universal tariffs, it doesn’t mean the Fed won’t cut rates. Similarly, whether the Republicans pass an extension of the Tax Cuts and Jobs Act (TCJA) or not won’t automatically make the Fed less or more dovish. Instead, the two economic factors that are more pertinent to the Fed rate cuts are inflation and economic growth. Now to be sure, tariffs and tax cuts can impact economic growth, so they do matter to the Fed. But that impact takes time and it’s an unknown, so don’t expect the Fed to automatically react to any tariff or tax policy, and importantly, tariffs and tax cuts will not eliminate the chances of another rate cut unless they result in 1) higher inflation or 2) slower growth. Given that, what would cause the Fed to cut rates?
Catalyst 1: Core PCE Price Index moves closer to 2.0% y/y. Right now, the main thing preventing the Fed from cutting rates is inflation, as it’s stopped declining towards the Fed’s 2.0% goal. According to the U.S. Bureau of Economic Analysis, the personal consumption expenditures, or PCE (the Fed’s preferred inflation measure), accelerated slightly in December, as price growth remains stubbornly above the central bank’s goal. The core PCE index, which excludes volatile food and energy components, was up 0.2% in December and up 2.8% year over year. It was the third straight month of a 2.8% year-over-year increase. Unless PCE continues to decline, the Fed will not be in any hurry to cut rates anytime soon.
Catalyst 2: Unemployment rate hits a new high. Most Fed officials have said they remain confident that inflation will return to their 2.0% target, but because economic growth is so solid they can essentially afford to wait on cuts to be sure inflation is still declining. However, if the unemployment rate were to start to rise and break above the 4.3% high from 2024 (that was an initial high that was revised lower) and head towards, say, 4.5%, that would likely be viewed as real deterioration in the labor market. And like we saw in August of last year, this would probably cause a growth scare and a dovish Fed pivot.
Bottom line, the Fed needs further progress on inflation (that re-instills more confidence in hitting the 2% target) or a sudden growth scare to again cut rates. Until one of those two things happens, it’s likely the Fed is on hold (and that is a headwind on stocks).
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere. A2225
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
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