Fed Rate Cuts May Not Be A Win For Stocks, Warns JPMorgan — Expects Dollar And Bond Yields To Fall - JPMorgan Chase (NYSE:JPM)

Strategists from JPMorgan have voiced concerns that the much-awaited Federal Reserve interest-rate cuts might not be as beneficial for stocks as investors hope.

What Happened: JPMorgan strategists, led by Mislav Matejka, observed a growing anticipation of interest rate cuts from the Fed. However, they caution that the reasons behind these cuts might not bode well for stocks, according to a MarketWatch report.

The strategists outlined three possible scenarios for the rate cuts. The first is a situation where the Fed cuts rates due to a clear weakening of economic activity. The second scenario, referred to as the “Goldilocks” case, features robust growth alongside mild inflation, with no strain on consumer purchasing power. The third scenario involves rate cuts despite emerging inflation, possibly due to pressure from the U.S. administration for lower rates.

The strategists predict a blend of the first and third scenarios, where activity is slowing but inflation is on the rise. They caution that investors might be disappointed if this outlook materializes. They also noted that the dollar typically weakens into the cuts and continues to fall afterwards, while bond yields move lower.

“Historically, whenever the Fed resumed its easing cycle following a pause, the dollar tended to weaken and continue declining, while bond yields also dropped,” noted JPMorgan strategists. They now anticipate the U.S. dollar hitting “new lows in most scenarios” and expect U.S. bond yields to fall as well.

They also predict that emerging market stocks will perform well when the Fed eases, and are reiterating their overweight on the region.

Why It Matters: The Fed’s decision to cut interest rates is contingent on various factors. Fed Chair Jerome Powell recently stated that while inflation has cooled from its 2022 peak, it remains “somewhat elevated,” and the central bank is not ready to adjust interest rates yet. However, a “significant majority” of committee members expect to cut rates later this year.

One of the factors influencing the Fed’s decision is inflation data. Funsdtrat’s Tom Lee explained that the European Central Bank’s decision to cut interest rates is linked to how it calculates core inflation—excluding housing costs. This differs from the U.S., where housing plays a significant role in inflation data. If the U.S. used Europe’s approach, its core CPI would appear lower than Europe’s, potentially justifying rate cuts.

Furthermore, the Fed’s decision on interest rates could be influenced by the next Federal Reserve chair. President Donald Trump‘s shortlist for the next Fed chair is heating up, fueling bets on deep rate cuts, pressuring the dollar, and reigniting concerns over the Fed’s independence.