With the Fed’s 0.25% rate cut, what will the stock market look like in Q4?

As widely expected, the Federal Reserve cut its policy rate by 25bp at the September FOMC meeting, aligning with market expectations. Moreover, the new dot plot projected at least two additional rate cuts within this year, exactly matching what the market had been hoping for. Leading into the announcement, concerns lingered over a potential “sell-the-news” reaction. Instead, with the Fed delivering in line with expectations, markets are moving higher without significant disruption.

Yet within this upward momentum, there are three important implications investors should consider. First, this cut was an insurance rate cut. Second, it is crucial to ask under what assumptions the Fed made this decision. Finally, the meeting revealed much about the independence and credibility of the Federal Reserve. Let’s break down these signals.

1. The Meaning of an Insurance Rate Cut

Heading into this meeting, markets were torn between hope and fear—mainly over employment and inflation. Producer prices swung from +0.7% to -0.1%, creating confusion, while consumer prices hovered around expectations. That mix raised concerns that companies would be forced to cut margins, eventually impacting employment. With labor data showing recent weakness, markets could not ignore the risk of recession.

This explains why markets demanded not just one but at least two to three cuts within 2025 to sustain upward momentum. The Fed’s willingness to deliver on that expectation is what makes this meeting a turning point.

Importantly, the Fed did not cut because inflation had stabilized. Inflation remains above the 2% target, still described by the Fed as “somewhat elevated.” The driver was employment, and by extension, concerns of a potential slowdown.

If employment uncertainty spreads, sentiment weakens, and consumption falters. The Fed acted preemptively to prevent that. In other words, this was a preventive, insurance cut. And as noted in the previous K3 Lab report “Markets Expect Nothing but a Bull Run,” labor remains the only major vulnerability. Production and consumption are strong, liquidity is abundant. Cutting rates due to employment concerns is like pouring fuel on an already burning market fire. The conditions for risk assets to rally are fully in place.

2. A Dovish Turn and Market Expectations

The new dot plot opened the door to two more cuts this year, perfectly aligned with what markets had already priced in. Had the Fed leaned hawkish, the shock could have derailed risk sentiment. Instead, the opposite occurred.

Chair Powell repeatedly acknowledged signs of labor market weakness. He made clear that despite lingering inflation risks, employment concerns justified easing. This underscores that the Fed’s current top priority is no longer inflation but jobs. Unless inflation flares up significantly, the easing bias will remain in place.

For risk assets, this is unequivocally positive. Lower discount rates, coupled with solid growth and liquidity, provide fertile ground for equities.

3. Fed Independence and Credibility

Perhaps the most significant takeaway from this meeting was the Fed’s independence. Investors had already assumed a rate cut was a done deal—FedWatch showed a 0% probability of a hike or hold. The real question was whether the Fed could demonstrate independence under political pressure.

The spotlight was on newly appointed Governor Miran, widely viewed as aligned with the Trump administration’s economic agenda.

His appointment fueled speculation that the White House was tightening its grip on the Fed. Had the FOMC outcome mirrored his stance too closely, the Fed’s independence would have been questioned, undermining credibility and destabilizing bond markets.

Instead, Miran’s dissent was just a minority view, with no impact on the committee’s overall direction. This demonstrated that the Fed remains cohesive under Powell’s leadership. Independence is intact, credibility preserved.

For markets, central bank credibility means predictability. Reduced uncertainty lowers risk premia and supports asset valuations. By reaffirming its independence, the Fed strengthened investor confidence.

4. Investor Implications

This FOMC leaves three key implications for asset allocation:

• Equities: With growth intact and rates falling, risk appetite strengthens. High-growth sectors—big tech, AI, infrastructure, financials—stand to benefit the most.

• Bonds: Short-term yields fall on cuts, but long-end rates remain anchored by growth. Expect curve flattening.

• Dollar & Capital Flows: The dovish tilt pressures the dollar short term, but Fed credibility supports U.S. asset demand. Any dollar weakness may prove temporary.

  
  

Conclusion: A Dual Message of Fuel and Stability

This FOMC was more than a rate cut. It was a threefold signal: insurance easing, a dovish pivot, and reinforced independence. Together, these provide both the justification and the stability for risk markets to climb.

The Fed acted preemptively to guard against labor risks while withstanding political pressure, thereby enhancing credibility. For equities, it creates an optimal setup for further gains.

In short, this FOMC left markets with “no reason not to rise.” The challenge now for investors is timing—gauging how long this accommodative backdrop will last. Independence gives stability, but if inflation re-emerges, the Fed can quickly reverse course. That uncertainty is the next variable investors must track most closely.