The Fed's rate cut is imminent, focusing on a soft landing!

As the Fed's rate cut approaches, investors are facing a new challenge: figuring out whether the Fed can achieve the so-called soft landing, with expectations of a soft landing helping boost asset prices this year.

Fed Chairman Powell said on Wednesday that they are "increasingly confident" that if inflation continues to cool, the Fed may cut rates in September. This is the strongest signal to date that officials are preparing to ease monetary policy soon.

However, for investors, this signal is far from all good news.

Some market observers have recently questioned whether the Fed has kept rates too high for too long, potentially jeopardizing the chance of achieving an economic soft landing, which involves lowering inflation without severely harming economic growth.

On the other hand, some investors are concerned that easing monetary policy during relatively strong economic conditions may reignite inflation, thereby limiting the extent to which the Fed can ultimately cut rates.

George Catrambone, Head of Fixed Income and Trading at DWS, said, "There is reason to believe that the hope for a soft landing still exists, but the risks are two-sided, and a soft landing will not be achieved by waiting too long."

Is the rate cut coming too late?

Most key data, including job numbers, show that despite interest rates being at their highest level in over 20 years for months, the U.S. economy remains resilient. However, the unemployment rate has been rising, and policymakers are increasingly focused on avoiding a sharp increase in unemployment, which is often associated with high rates and slowing inflation.

Peter Baden, Chief Investment Officer at Genoa Asset Management, said, "What you're seeing is the fraying at the edges of the job market. The question now is whether this will evolve into a broader slowdown."

On Friday, the U.S. will release non-farm payroll data, providing investors with a key overview of the economy. Later this month, the Fed's Jackson Hole Symposium will provide policymakers with an opportunity to fine-tune their information.

Some investors worry that if cracks start to appear in the economy, rate cuts will take a relatively long time to stimulate economic growth, increasing the likelihood of an economic downturn.

Jack McIntyre, Global Fixed Income Portfolio Manager at Brandywine Global Investment Management, said, "The lagging effects are starting to take hold. With the Fed entering an easing cycle, some negative factors may already be embedded in the economy. Even if the Fed takes action in September, it may not be enough to change the economic trajectory for 2025."

In fact, some believe that the damage to the economy may already be showing. Former New York Fed President Bill Dudley called for an immediate rate cut in a Bloomberg column last week, citing the so-called Sahm Rule, which indicates that rising unemployment signals an economic downturn is nearing a tipping point

A Slow Rate-Cut Cycle?

Some are concerned that rate cuts may trigger a rebound in inflation, similar to the consumer price increases earlier this year that shocked the market. Hans Mikkelsen, Managing Director of Credit Strategy at TD Securities, said that this could make it difficult for the Federal Reserve to achieve the market's expected target of nearly 75 basis points of rate cuts this year.

Jack Janasiewicz, Chief Portfolio Strategist at Natixis Investment Managers, believes that a shorter-than-expected rate-cut cycle could hinder the rotation of small-cap stocks and other rate-cut beneficiaries that the market saw earlier this month.

Furthermore, the impressive gains in the U.S. stock market this year may suggest that much of the Fed's accommodative policies are already priced into asset prices, limiting future upside potential.

Research data from CFRA shows that between the last rate hike of the previous cycle and the first rate cut of the new cycle, the S&P 500 index on average rose by 16.1%. However, in the 12 months following a rate cut, the index only rose by 4.8%. The S&P 500 index has risen by 16% this year.

Tony Rodriguez, Head of Fixed Income Strategy at Nuveen, believes that by the first half of 2025, the yield on the 10-year U.S. Treasury bond may remain around 4%, while valuations in the stock market "overall look quite high." He said, "There are not a lot of additional opportunities in this market."