'Backed into a corner': Experts react to 25 basis point Fed rate cut

Source: Trustnet

The Federal Reserve cut interest rates by 25 basis points on Wednesday, taking the lending range to 4%-4.25%, but market commentators warn that divisions across the central bank pose questions for investors.

In a move that was widely expected by the market, Fed chair Jerome Powell and his fellow governors dropped the rate for the first time in 2025 to help stoke growth, despite inflation remaining elevated.

Ed Harrold, investment director at Capital Group, said: “Today’s rate cut in the face of a softening economic picture in the US is a sign that the Fed is willing to support the economy despite potentially stubborn inflation.”

Lindsay James, investment strategist at Quilter, added the Fed was “backed into a corner” by the labour market, which she described as “in a precarious position”.

“Until sharp data revisions by the Bureau of Labour Statistics prompted Powell to highlight a ‘shifting balance of risks’, this cut was seen as hanging in the balance,” she said.

“However, the decline in job creation that has seen payrolls revised down by 911,000 in the year to March has highlighted that cracks are emerging in the US economy and the Fed clearly feels it warrants action.”

Unemployment remains relatively stable, but this is the result of lower growth within the labour force – due in part to the government’s stance on immigration.

The latest rate cut comes after president Donald Trump heaped pressure on the central bank to lower rates, including attempting to fire governor Lisa Cook and criticising Powell.

James said the chair likely delivered the decision “with somewhat gritted teeth”, after “having endured months of political pressure and insults”.

Isaac Stell, investment manager at Wealth Club, warned that this latest move is “unlikely to satisfy the president,” however, who has stated he expected a “big cut” at the latest meeting.

James agreed. “Trump will not yet be satisfied,” she said, as he has “repeatedly called for far deeper cuts” that have yet to materialise despite rates now standing at their lowest since 2022.

There was one dissenting voice at the Federal Reserve who agreed with the president and cast their vote for a 50 basis point cut, Stephen Miran. He was appointed last month after former governor Adriana Kugler resigned.

“Governor Kugler’s hurriedly appointed replacement, Stephen Miran, is effectively on a four-month secondment from his role as a White House economic adviser and was the only member of the committee to vote for a larger 0.5% rate cut,” said James.

Moving forward, some, such as American Century Investments co-head investment strategist Joyce Huang, had expected one additional cut before the end of the year, but this is now under pressure.

Many eyes were drawn to the Fed’s ‘dot plot’, which is a forward-looking expectation of where governors believe rates need to settle. Nine participants expect two additional rate cuts by year-end, while six see none.

“Prior to today's meeting, we were expecting only one additional cut after today in 2025, but now we expect a cut at each of the next two meetings based on the dot plot and the new governor Miran dissenting in favour of a 50bp cut,” she said.

This was echoed by David Rees, head of global economics at Schroders, who said: "We now think that the Fed will deliver another two 0.25% cuts by the end of 2025.”

Markets are pricing in even more, with the rate going below 3% by the end of 2025, a view he said was "too aggressive”.

The latest cut is good news for bonds, according to Capital Group investment director Ed Harrold, and, in particular, high-quality credit global investment-grade corporate bonds.

“Yields remain attractive – around 5% – offering meaningful income potential and a cushion against volatility. Duration is once again proving its worth, providing diversification benefits as the economy slows, though not yet in recession territory, and central banks pivot towards easing,” he said.

“With uncertainty rising, a robust defensive allocation is more important than ever. Corporate fundamentals and technicals are strong, with credit metrics and leverage at healthy levels. Demand for investment-grade corporates remains solid due to the elevated yield environment.”