Markets are sure the Fed will cut in September, but the path from there is

Friday’s booming rally turned into Monday’s reality check as investors weighed just how aggressive the Federal Reserve will be on lowering interest rates and how the moves might impact the broader business and economic climate.

Chair Jerome Powell, in his annual address at the Jackson Hole, Wyoming, symposium, gave Wall Street hope of easier days ahead when he said conditions “may warrant adjusting our policy stance,” which is generally seen as “Fedspeak” for cutting rates.

Stocks soared while Treasury yields plummeted on the news as the knee-jerk reaction took hold for a rate reduction when the Federal Open Market Committee issues its next decision on Sept. 17.

However, cheer turned to caution Monday as market experts weighed what happens next, even if a move next month is baked in. Stocks were mostly lower and shorter-maturing Treasury yields, which are more sensitive to Fed action, moved higher.

“I’m on the slower side more than the faster side if the Fed, does go,” said Jason Granet, chief investment officer at BNY. “He definitely moved the door ajar, as opposed to kicked it wide open for September.”

Traders on Monday were pricing in a near-certainty of a September quarter percentage point reduction from the Fed’s current target rate, currently around 4.3%. The implied probability of 82% was only slightly higher than a week ago but well above the 62% odds of a month ago, according to the CME Group’s FedWatch measure of futures prices.

However, there is less certainty from there.

The implied probability for another cut in October was just 42%. That second cut is about fully priced in for December, but there’s just a 33% expectation for three total moves this year.

“I think there’s more to play for in the data between now and the September meeting,” Granet said. “So then the question will start to center around pace.”

Skeptics of a faster easing pace center their arguments around ongoing concerns about tariff-induced inflation and an economy that is holding up despite signs that the labor market is slowing.

“Although we are aware of the extreme political pressures on the Fed to ease, and we acknowledge cracks emerging in some labor market data, from our perch … the case for cuts looks modest,” Lisa Shalett, chief investment officer at Morgan Stanley, said in a note. “And we can’t help but ask — what problem, exactly, does the Fed feel an urgency to solve?”

Despite the market pricing, Morgan Stanley sees just a 50% probability for a September reduction. The firm also cited uncertainty about inflation as well as the Fed’s commitment to independence amid the heat from President Donald Trump and White House officials to lower rates.

Shalett also cautioned clients about putting too much faith in Fed easing for the next leg up in stocks as “we question the impact of rate cuts in any case, given the reality that…