Unsurprisingly, the U.S. Federal Reserve has revised its key rates down again to 3.75%-4.0%. But investors, who were already looking beyond that, were disappointed by the fact that another rate cut in December is far from a foregone conclusion, according to Jerome Powell.
The promise of even cheaper credit in the future is evaporating. A scenario that does not please investors.
The U.S. Key Rate
In the United States, the 2nd cut in key rates in 2025 could well be the last. A scenario that disappoints investors.
A less certain continuation in 2026
Investors should have celebrated a new cut in U.S. key rates, but it was not the case. Jerome Powell's cautious speech on the future of monetary policy signals that the Fed wants to hold its December monetary policy meeting without pressure to cut rates again.
At the same time, opposed views are prevalent within the Monetary Policy Committee. While a majority voted in favour of the 0.25% cut, others would like to go further, with a 0.5% cut and still others would have left U.S. key rates unchanged.
This worries investors who were expecting a continuation of the downward movement before the end of the year, as well as in 2026. Until then, investors were betting by more than 90% on a further rate cut in December and the continuation of the movement in 2026. According to them, U.S. key rates are expected to be between 2.75% and 3.0% by the end of the year.
The Fed is questioning this trajectory. The cost of credit is expected to fall less than expected in 2026. This is a situation to which the U.S. markets will have to adapt, as well as many others, since the yield offered by U.S. debt serves as the benchmark for the price of credit almost everywhere.
Good reasons for the Fed to remain cautious
In view of the figures, the Fed's caution seems justified to us. The country has been in lockdown for a month now, limiting the release of economic data at a time when the U.S. central bank depends on it. The rationale for the two rate cuts in September and October is the slowdown in job creation, which raises concerns about a weaker labour market. But the numbers are scarce.
At the same time, the U.S. economy remains robust and does not require additional stimulus. Annualised growth in Q2 was 3.8%. The GDPNow indicator, published by the Atlanta Fed, suggests a 3.9% increase in the third quarter. These are imposing figures given the lack of visibility weighing on the world's 1st largest economy.
Additionally, there is limited room for further cuts in key rates. U.S. inflation is currently at 3.0%. The bulk of the impact of tariffs is long overdue (the ability of U.S. companies to absorb rising costs will only last for a short time). The rate cuts already agreed will make credit cheaper. They will revitalise household demand, mainly since they will be supported by the reduction in the tax burden approved this summer.
Taken together, these factors are likely to stimulate price increases to levels even higher than those we see today. It isn't easy to see how the Fed could follow the path expected by investors.
With inflation at levels similar to those present today within a year (a scenario that is not impossible) and key rates between 2.75% and 3.0%, real rates (after inflation) would be zero, or even negative (i.e., lower than inflation). A situation that could be understood in times of crisis, but challenging to know at a time when growth is holding firm.
The end of the balance sheet reduction
Another critical decision announced by the Fed is the end of its balance sheet reduction. During the pandemic, it had printed money to buy debt (mostly sovereign), providing the U.S. Treasury with cheap financing. At its peak (Spring 2022), its balance sheet was close to USD 9000 billion.
However, since then, the Fed has been gradually reducing its holdings, thereby forcing the Treasury to find other buyers for its debt issues. Its balance sheet is currently less than USD 6600 billion.
Believing that liquidity conditions are now adequate, it has decided to end the reduction of its balance sheet. Its demand for debt is therefore not expected to decline further in the future, which should help to stabilise the U.S. debt market somewhat. Offering yields of nearly 4% for 10-year maturities, it remains attractive to us and is incorporated into all our portfolios.
Some impacts are immediate, others will be less so
For the American consumer, what matters is the rate cut itself. The cost of mortgages is expected to fall. The returns offered by savings accounts are also available. This is one of the objectives of a rate cut: to stimulate consumption and investment, rather than savings.
But not all credit sectors will benefit from this: faced with record levels of late payments (or defaults), car loans are not expected to become cheaper. As for interest rates on credit cards, which American households use without moderation, they are currently around 20%. A 0.25% cut would have only a small impact, even if it had to be passed on, which is far from certain.
The rate cut may therefore please investors and companies. However, its impact on the real economy is not always easy to detect.
The real economy is performing well
While the Fed has followed the scenario imagined by the markets for September and October, it is less enthusiastic about repeating it in the coming months. It wants to hold its next monetary policy meeting without preconceptions.
This does not please investors who were expecting a (much) cheaper loan in 2026. However, we must face the facts: in the U.S., the real economy continues to perform well, with excellent growth rates.
The United States is a must-have in any diversified portfolio and is present in our current asset allocation strategy:
