The Fed's Dilemma: Cutting Into Uncertainty

When the Federal Reserve began its current easing cycle last September, the consensus view was straightforward: inflation was beaten, the labour market was cooling, and a soft landing was plausible. Six months later, that confidence has given way to something more cautious.

The latest PCE data, released last week, showed core inflation running at 3.1% year-on-year — well above the 2% target and stubbornly resistant to the disinflation narrative. Meanwhile, the jobs market has added an average of 180,000 positions per month over the past quarter, hardly the weakening that would justify accelerated rate cuts.

Markets are now pricing in just two cuts this year, down from six at the start of January. The debate inside the FOMC, according to sources familiar with the deliberations, has shifted from "how fast to cut" to "whether to cut at all in the first half."

For risk assets, the implications are significant. The equity rally of late 2025 was built substantially on the expectation of a steady glide path to a 3% terminal rate. If that glide path extends — or reverses — the valuation math for long-duration growth stocks becomes considerably more complicated.