The Fed resumed its rate-cutting cycle in September.

  • The Fed cut policy rates by 25 basis points in September, its first reduction since 2024.
  • Policymakers’ median projection for the federal funds rate (the dot plot) now indicates two additional cuts are expected this year.
  • The FOMC's latest economic projections show inflation near the target in 2027.

A softening labor market gives the Fed scope to continue easing.

  • The FOMC's statement said the committee “judges that downside risks to employment have risen.”
  • We believe concerns about a weakening labor market are likely to outweigh those about lingering inflation in the Fed’s decision-making.
  • Given the Fed's dual mandate, we expect rates to come down by a further 75 basis points by the end of 1Q26.

With policy rates set to fall further, investors should put cash to work now.

  • We recommend that investors phase excess liquidity into diversified portfolios.
  • To achieve alternative sources of portfolio income to cash, we see medium-duration quality bonds and equity income strategies as appealing.
  • We also expect lower interest rates, robust corporate earnings, and AI tailwinds to support further gains for equity markets over the coming year.

New this week

US private payrolls contracted by a seasonally adjusted 32,000 jobs in September, the biggest monthly decline since March 2023, according to data from ADP.

Did you know?

  • Soft landing rate cuts have historically been positive for stocks, and the Fed’s shift from restrictive to more neutral policy should help extend the bull market.
  • In a downside scenario, if labor market weakness proves to be more severe or durable, we believe the Fed could cut rates by 200-300bps by mid-2026.
  • Cash tends to underperform other assets over time: Stocks have outperformed cash in 86% of all 10-year periods and 100% of all 20-year periods since 1926, with cumulative returns more than 200 times higher than cash over the long term.

Investment view

We believe the resumption of the Fed's rate-cutting cycle increases the imperative for investors to put cash to work. We recommend phasing excess liquidity into diversified portfolios. We also continue to like quality bonds, which can offer a more durable source of income. Investors underallocated to equities should consider phasing in and using market dips to add exposure to preferred areas, including AI, power and resources, and longevity.

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