- Solve real problems with our hands-on interface
- Progress from basic puts and calls to advanced strategies
Interactive Options Course
Posted September 26, 2025 at 11:00 am
The Federal Reserve’s (Fed) decision to press ahead with interest rate cuts at a time when the solid real economy is close to full employment raises the risk of higher inflation becoming ingrained. We now think that the Fed will deliver another two 25bps cuts by the end of 2025. But rates are unlikely to fall further thereafter as robust growth drives a rebound in labour market activity and causes inflation to rise. As such, we continue to believe that market pricing for a terminal rate of below 3% is far too aggressive.
We are surprised the Fed is easing at all. In our last global forecast update we reasoned that as the tariff and fiscal fog cleared, a rebound in activity and hiring would stay the Fed’s hand. But while the broader economy has indeed picked up – something acknowledged by the Fed’s upward revision to its own growth forecast – payroll growth has slowed in recent months. We put that down to a combination of lagged labour market dynamics and the administration’s clampdown on immigration. Chair Powell had a different interpretation at Jackson Hole, warning that “the balance of risks appears to be shifting”.
His comments at the September meeting press conference continued to highlight that while inflation “remains somewhat elevated”, economic growth has “moderated” and “job gains have slowed”. This, along with the signal from the latest dot plot, mean we now expect the Fed to cut rates by 25bps at its next two meetings to 3.75%.
However, we remain concerned that easing policy at this stage of the cycle will prove counterproductive. Indeed, the backdrop is hardly one that screams for stimulus. Equities are at record highs, credit spreads are very tight, and the economy is already running above potential at a time when fiscal policy is set to add more fuel in the months ahead. In this environment, rate cuts are more likely to stoke inflation than real growth. We’ve nudged our 2026 US GDP growth forecast up only modestly – from 2.2% to 2.3% – but lifted our inflation forecast more meaningfully to a consensus-busting 3.3%.
Looking further ahead, there’s a material risk inflation becomes unanchored. Structural constraints – especially a shrinking labour supply – mean the economy’s potential growth rate is falling. That raises the odds of a tighter labour market, faster wage growth, and stickier inflation. Long-dated bonds won’t like that, especially given the already troubling debt dynamics.
Globally, stronger US demand should be a tailwind. With trade risks receding and global manufacturing indicators turning up, we’ve revised up our ex-US growth forecasts too. But unlike the US, the impulse abroad should skew more towards real growth than inflation. Ironically, despite the Trump administration’s best efforts to re-shore demand, the rest of the world may end up the biggest winners from its stimulus push.
—
Originally Posted on September 17, 2025 – Fed cuts likely to fire up inflation in 2026
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realized. These views and opinions may change. Schroder Investment Management North America Inc. is a SEC registered adviser and indirect wholly owned subsidiary of Schroders plc providing asset management products and services to clients in the US and Canada. Interactive Brokers and Schroders are not affiliated entities. Further information about Schroders can be found at www.schroders.com/us. Schroder Investment Management North America Inc. 7 Bryant Park, New York, NY, 10018-3706, (212) 641-3800.
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Schroders and is being posted with its permission. The views expressed in this material are solely those of the author and/or Schroders and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Related Articles
Join The Conversation
For specific platform feedback and suggestions, please submit it directly to our team using these instructions.
If you have an account-specific question or concern, please reach out to Client Services.
We encourage you to look through our FAQs before posting. Your question may already be covered!