After months of relentless pressure from President Donald Trump to ease borrowing costs, the Federal Reserve is now all but certain to lower interest rates on Sept. 17, ending a nine-month pause and resuming what could be a prolonged cutting cycle.
According to CME Group's FedWatch Tool, markets are pricing in a 100% probability that the Fed will cut the federal funds rate by 25 basis points, bringing the target range to 4.00%–4.25%. There's even an 11% chance of a more aggressive 50-basis-point cut.
But that's just the beginning. Traders now expect another cut in October, with 84% odds, and a third one in December 2025, priced at 75%.
But while Wall Street is cheering, with the SPDR S&P 500 ETF Trust (NYSE:SPY) trading near record highs, not everyone is convinced this is good news.
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Does The Economy Even Need This Cut?
Market veteran Ed Yardeni doesn't think so. In a note released Monday, Yardeni said, "We continue to believe that by cutting rates this month, the Fed would be stimulating an economy that doesn't need easier monetary policy."
Yardeni highlighted that the Atlanta Fed's GDPNow model shows third-quarter real GDP growth tracking at 3.0% on an annualized basis.
Yardeni noted that the real issue in the labor market isn't weak demand but a labor shortage.
“Stimulating an economy that doesn't need stimulation won't create more workers to address the undersupply that's constraining the demand for labor,” he said.
What Happens To the Stock Market Next?
Yardeni Research still holds a bullish base case for stocks. Their S&P 500 target is 6,600 by the end of 2025, with a goal of 7,700 by the end of 2026.
But here's the twist: If the Fed cuts rates and signals more are coming, Yardeni said they would raise the probability of a ‘melt-up' scenario, with the S&P 500 hitting 7000 by year-end 2025.
They currently assign 55% odds to the base case, 25% to a melt-up, and just 20% to a correction by the end of 2025.
"Our concern is that lowering interest rates will lead to financial instability, including a melt-up or meltdown in the stock market," he added.
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