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Podcast: (17 min)
Video: CIO's Devinda Paranathanthri on putting cash to work (2 min)
Video: The China equities rally with CIO's Suresh Tantia (6 min)

Global markets were largely in a holding pattern on Tuesday as investors awaited signals from the Federal Reserve about its path for policy easing. The S&P 500 index dipped 0.1% after hitting a record high at the start of the week, while the yield on the 10-year US T reasury fell 1 basis point to 4.02%. The US dollar weakened further, while gold briefly touched USD 3,700/oz.

The US central bank is widely expected to lower the target range of the federal funds rate by 25 basis points today to 4-4.25%, after keeping rates steady since last year’s easing of 100 basis points. Recent US data have pointed to a weakening labor market, while inflation has risen only modestly.

But while the quarter-point rate cut is fully priced in by the market, investors will be looking for clues on the Fed’s next steps, parsing the FOMC statement, Fed Chair Jerome Powell’s press conference, and the “dot plot” that charts the rate forecasts of policymakers in their quarterly economic projections.

Will the Fed continue to prioritize labor market weakness over inflation risks? Nonfarm payroll growth has averaged just 27,000 per month since May, new claims for unemployment benefits have risen to the highest level since late 2021, and the latest estimate from the Bureau of Labor Statistics suggests that the US economy may have generated about 911,000 fewer jobs than previously expected in the year to March. These signs of a weakening labor market, coupled with inflation rising at a relatively modest pace, have led to high market conviction that the Fed will cut rates today. However, inflation remains higher than the Fed’s 2% target, and leading indicators suggest price pressures are likely to persist. If the Fed places greater emphasis on the labor market, investors would gain confidence that additional rate cuts are on the way.

What is the degree of easing reflected in the “dot plot”? The “dot plot,” which is included in the quarterly economic projections, should provide a more explicit indication of how far and fast policymakers expect to cut interest rates. In June, the median dot implied two 25-basis-point reductions by the end of the year, although markets have since moved to price in nearly 70 basis points of rate cuts as labor demand softens. We expect 75 basis points of easing this year and another 25 basis points to come in 1Q26, as the Fed seeks to balance labor market concerns with inflation risks.

Will Powell deliver a dovish tilt in his press conference? In addition to hard data that could provide guidance on the Fed’s monetary policy, Powell’s addresses following FOMC meetings have also been key in interpreting the US central bank’s stance. Any hawkish element in his remarks could challenge investor optimism over future Fed rate cuts and trigger market volatility.

For investors, we continue to believe the backdrop of lower rates is positive for quality bonds, equities, and gold. We recommend putting excess cash to work.