Investors aren’t cheering for Fed rate cuts anymore

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Investors aren’t cheering for Fed rate cuts anymore

As weaker-than-expected data has spurred concerns about US economic growth, markets have moved to price in more easing from the Federal Reserve this year.

On Tuesday, traders were betting on three interest rate cuts from the Fed in 2025 for the first time this year. Debate around when the next cut will come has intensified too. Markets now see a 50/50 chance the Fed lowers rates at its May meeting,

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Just a week ago, they were pricing in a 75% chance the Fed would hold rates steady that month.

A reduction in the cost of borrowing should be a good thing for consumers and companies — and therefore markets. But stocks have slumped amid the shifting Fed narrative. On Tuesday, the S&P 500 (^GSPC) hit its lowest level since before Donald Trump won the presidential election in November.

Typical interest rate cut trades like the small-cap Russell 2000 (^RUT) — which has rallied over the past several years when markets price in more interest rate cuts — have faltered too. With fears of an economic slowdown driving the Fed narrative, the Russell 2000 is down more than 6% this year, far worse than the S&P 500’s roughly flat return.

The recent sell-off in markets remains all about the economic growth story. Citi equity strategist Drew Pettit told Yahoo Finance that if soft economic data is what drives the Fed to ease monetary policy, markets won’t welcome rate cuts as they have in the past.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

“‘Fed cuts because of weak economic data’ is not a good thing for markets anymore,” Pettit said. “If we were talking about this two months ago, you know, ‘Fed cuts against a resilient backdrop’ was good for markets.”

SNP – Delayed Quote • USD

At close: March 5 at 4:52:34 PM EST

^GSPC ^IXIC ^RUT

January data showed that consumer spending fell for the first time in nearly two years. Separate data showed retail sales for the month saw the largest monthly decline in a year.

Housing activity has remained in the doldrums. And most recently on Monday, readings on manufacturing activity and construction spending were weaker than expected, sending forecasts for economic growth in the first quarter tumbling.

Add in that President Donald Trump’s tariffs are projected to stunt economic growth in the near term, and there’s a building market narrative that the Fed may be more likely to cut interest rates again to stave off an economic slowdown even if inflation hasn’t reached the central bank’s 2% target.

“Recession risks are rising,” Renaissance Macro head of economics Neil Dutta told Yahoo Finance. “But I think once the Fed gets on the right side of the eight ball, those recession risks will decline.”

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