With the Fed poised to lower overnight interest rates next week, investors may be disappointed with the ultimate outcome. Rate cuts are too blunt to deal with many of the issues facing the U.S. economy.

 

Let’s look at the potential asset-class implications if the Fed moves too aggressively

 

Interest rate futures contracts indicate that overnight borrowing costs will fall to below 2 % by the end of 2026.

 

This may prove to be inconsequential.

 

The U.S. economy will not collapse if rates are held constant next week, nor will a rate cut usher in a golden age of prosperity. Most investors realize that in a dynamic and robust economy, a few basis points for a few months likely amount to noise.

 

The real question is how the Fed is supposed to fix the suite of economic issues confronting the U.S. when all it has is a hammer very few nails.

 

Let’s start with labor markets, the oft-cited reason the central bank needs to cut. It’s clear that labor demand has fallen dramatically over the past 3 months. That’s as evident in nonfarm payroll numbers as it is in private data sources such as the ADP and Institute for Supply Management employment surveys.

 

But how much will lower overnight interest rates change this ?

 

Traditionally, rate cuts work by stimulating economic activity spurring companies to hire. One of the most important channels to spur growth is cash-out mortgage refinancing. With nearly 60 % of borrowers sitting with mortgages below 5 %, the near-term need to refinance is effectively removed.

 

The fall in labor demand is occurring as economic growth continues at a brisk pace. U.S. GDP increased 3.3 % on an annualized basis in Q2 2025. If that’s not sufficient to promote hiring, what level of growth would be required ?

 

With unit labor costs in the second quarter up 2.5 % year over year, it’s hard to see how the Fed can spur growth and hiring without pushing the U.S. uncomfortably close to wage-driven price inflation.

 

Rather than a general lack of economic activity, the key labor market drivers are technological change and a mismatch between corporate hiring needs and the existing labor pool’s skills. The Fed easing overnight borrowing rates does not solve this problem.

 

Even if labor markets are a weak justification, Fed accommodation could be useful if other areas of the economy are suffering from restrictive policy.

 

• Yield curve: The classic sign that policy is too tight is an inverted yield curve, where long-term rates are below short-term rates. This drives the idea that elevated Fed policy rates are choking off growth and risking a recession. If anything, the yield curve is telling us that anticipated Fed cuts are going too deep and risking a resumption of inflation.

 

• Corporate borrowing costs: Credit spreads—the additional yield relative to Treasuries that companies pay to borrow—are near their lowest levels in decades, and there are numerous signs of borrowers having market power in deals, with private credit funds, collateralized loan obligation (CLO) issuers, and banks fighting to provide loans.

 

• Inflation hedges: Gold, U.S. equities, and home prices are all at or near their all-time highs. This speaks to an environment where people are concerned about the value of the dollar eroding and the need to protect against higher future inflation. That’s hardly an indicator the Fed is making money too hard to get.

 

The bottom line here is that even if monetary policy is a bit restrictive, in the real world, it’s simply not. The explanation is found in loose fiscal policy.

 

One can argue about the exact correlation between budget deficit growth and policy rate cuts, but there’s a solid case to be made that the current U.S. budget deficit is equivalent to between 3 and 5 rate cuts.

 

The net result is that in the context of current fiscal policy, monetary policy looks close to appropriate and far from excessively restrictive.

 

Dollar devaluation is one likely result we see from an unnecessarily aggressive Fed rate-cut cycle. The U.S. dollar is already down 10 % versus major counterparts this year, and we would expect rate cuts to provide additional headwinds.

 

For those who hold equities, real estate, and precious metals, there probably isn’t a large downside from excessively cheap money. These assets can act as a hedge against inflation and tend to benefit as the dollar weakens.

 

Borrowers also tend to benefit from a low-rate, cheap-dollar environment, a point that is probably not lost on the U.S. Treasury, the world’s largest borrower.

 

The people paying for the party are creditors.

 

Not only will creditors have reduced purchasing power for foreign goods, but devaluation will likely have a meaningful negative impact on relative portfolio performance. Folks who are holding bonds to make a downpayment on a home, for instance, will likely find their homebuying power appreciably diminished if the dollar’s value continues to erode.

 

The Fed can play an important role in defending the interests of long-term creditors, which include both price and currency stability. An aggressive rate cut policy likely undermines those interests and could make it more difficult for the U.S. to sell long-term bonds at attractive prices in the future. Stand, and hopefully deliver

 

With the likelihood of forthcoming rate cuts, The U.S. Fed, will certainly add monetary fuel to the fire, however, this would come at the expense of the value of long-term U.S. government securities.

 

As always, please let me know if you have any questions or comments.