Fed Rate Cut Likely Tomorrow, But How Long Will Rates Stay Above Neutral?

According to the CME FedWatch Tool, there is a 96% probability of a 25-basis-point rate cut at the upcoming FOMC meeting, alongside a 3% chance of a deeper 50-basis-point cut. While the likelihood of an aggressive move is small, the fact that it has entered the discussion reflects the fragility of the current economic landscape.

A Shift in the Debate: From "How Much" to "How Long" above Neutral Rates

For most of 2024 and early 2025, the Fed’s narrative revolved around whether and how much it would cut rates. That conversation is now shifting toward a more important question: How long will rates remain above the neutral rate of 3%?

Current projections show that by October 2025, there is an 80% probability that rates fall below 4%, compared with today’s peak of 5.25–5.5%. This signals a clear transition from restrictive to more accommodative policy. Interestingly, the first meaningful probabilities of rates dipping below 3% don’t appear until September 2026, indicating that while cuts are likely to be steady, a return to ultra-low borrowing costs is still some way off.

Why the Fed is Easing: Cracks in the Labor Market

Growing signs of weakness in the U.S. labor market are driving the Fed’s dovish tilt:

• Payroll revisions have halved previously reported job growth.
  
  
• JOLTS data shows job openings have now fallen below the number of unemployed people.
  
  
• Jobless claims recently spiked to their highest level since October 2021.
  
  

These indicators suggest that the labor market, once the bedrock of U.S. economic resilience, is starting to soften.

The Inflation Puzzle

Despite labor market weakness, inflation remains sticky. Prices are still hovering above the Fed’s 2% target, and risks of a reacceleration remain—particularly from wage pressures and energy prices. This creates a policy dilemma: the Fed wants to ease to support growth but must remain cautious to avoid reigniting inflation.

Market Implications

For investors, the key takeaway is that we’re moving into a lower-for-longer interest rate environment, but not necessarily a return to the near-zero era of the 2010s.

• Equities: Lower rates tend to support valuations, particularly in rate-sensitive sectors like real estate, consumer discretionary, and technology.
  
  
• Bonds: Fixed-income markets are likely to benefit as yields gradually decline, though inflation risks could limit upside.
  
  
• Dollar & Commodities: A softer Fed stance may weaken the U.S. dollar, lending support to gold and other commodities.
  

Conclusion

Tomorrow’s Fed rate cut may feel like a certainty, but the real story lies in the path ahead. The shift in narrative—from debating how much to cut, to how long rates remain above neutral—is crucial. While markets are cheering the prospect of easing, the Fed will need to balance growth risks against sticky inflation. Investors should prepare for a landscape of gradually declining rates, but not expect a rapid return to ultra-loose monetary policy.