The Fed is preparing to take over from the ECB - September 08, 2025

While the ECB appears to be ready to confirm the end of its cycle of rate cuts, the Fed is preparing to take over on September 17. The political pressure weighing on the US central bank is certainly causing some mistrust, but the arguments in favor of a rate cut seem fairly solid.

Against a backdrop of repeated attacks by Donald Trump on the US Federal Reserve, the latter is expected to announce on September 17 that it will resume the cycle of rate cuts that was interrupted in December 2024. At the Jackson Hole symposium in August, Jerome Powell laid the groundwork, referring to a “shift in the balance of risks” linked to the slowdown in the labor market. As for the additional inflation caused by higher tariffs, it does not appear to be spreading widely, thanks in particular to wage disinflation (Chart 1). In this respect, the situation is very different from the one that saw inflation soar during the post-Covid reopening.

The latest employment report for August confirms this diagnosis. Net private job creation slowed again (+38K after +77K in July), the unemployment rate rose to 4.3%, and the underemployment rate reached 8.1% (Figure 2). Hourly wages continued to moderate, rising 3.7% year-on-year, the lowest level in this cycle.

With fairly restrictive key rates – 4.3%, compared with around 3% for the rate considered “neutral” by Fed members – the US central bank has considerable room for maneuver. Markets are anticipating an initial rate cut of at least 25 basis points on September 17, followed by a series of adjustments that would bring the Fed rate back to just above 3% by March 2026 (Chart 3).

After sitting out since December 2024, the Fed will therefore extend the monetary easing policy that most developed countries (except Japan) have been pursuing since the middle of last year. This is an important signal at a time when the ECB, which has been leading the cycle of rate cuts, is confirming its message of a pause. Monetary easing in developed countries has been one of the pillars of the stock market rally for several quarters.

In this context, we are keeping our allocations unchanged. We remain invested in equities while managing political risks – including the French issue – through index option hedges.