Why the Fed Isn’t Cutting: The Market’s Blind Spot

04 August 2025

Markets are charging ahead with conviction that rate cuts are coming soon and coming fast. But in the context of what we’re actually seeing: stocks at all-time highs, the easiest financial conditions in years, strong labor markets, persistent core inflation, and a structurally expansive fiscal path, this rate-cut optimism looks increasingly disconnected from macro reality.

Stewards Investment Capital - Katy Murless

Financial Conditions Are Already Easy

The financial conditions index (FCI) is now at its loosest level in three years. Equities are surging, credit spreads are tight, and capital markets are functioning smoothly. This is not the environment in which central banks rush to inject stimulus.

The Fed’s job is not to juice markets. It’s to maintain price stability. Right now, markets are doing the easing for them. The path of least regret is to stay higher for longer, not to stoke further asset inflation.

Labor Market Tightness Is Coming Back

Unemployment is falling, not rising. The consensus narrative of a cooling labor market is losing steam, and that’s before we factor in the likely collapse in net immigration under this administration’s policy stance.

Net migration has been a quiet shock absorber for wage pressure in recent years. If that flow drops from over 1 million to zero or even negative territory, as now seems plausible, labor supply tightens sharply. That drives the unemployment rate even lower, and wage inflation higher.

Markets may not be pricing this in. But the Fed is surely watching this closely. And it gives them every reason to delay, or even avoid, cutting rates in the near term.

Stewards Investment Capital - undocumented to the Inited States

Source: CBO (Congressional Budget Office), Transactional Records Access Clearinghouse, U.S. Customs and Border Protection and author’s calculations via Federal Reserve Bank of San Francisco. “POE” – Port of Entry.

Inflation Risks Are Tilting Up Again

Core inflation remains elevated, particularly in services. Add in two additional upside risks: a weakening dollar and incoming tariffs.

The effective tariff rate is projected to reach 16.5% under current policy momentum. While that level is unlikely to derail growth, it could contribute to short-term inflation pressures. Chicago Fed President Austan Goolsbee cautioned that the ongoing stream of new tariff announcements challenges the notion that tariffs are a one-time price shock. Without greater certainty about where trade policy is headed, the Fed may need to delay rate decisions until the inflation outlook becomes clearer.

Fiscal Policy Is Now a Major Tailwind

The President’s fiscal package is expected to add roughly 0.9% to GDP in 2026. That is a meaningful positive fiscal impulse, particularly when layered on top of an economy already growing above trend.

This is not an economy in need of support. It’s one where excess demand risks colliding with constrained supply, particularly in housing, labor, and energy. The Fed cannot ignore that dynamic, and it will almost certainly slow the pace and magnitude of any policy easing.

What This Means for Investors

Recalibrate expectations: A July rate cut is looking increasingly unlikely.
Stay grounded in fundamentals: With rate cuts unlikely in the near term, focus on income-generating strategies with strong downside protection.
Avoid duration traps: This is not the environment to chase long-duration fixed income. Stick to short- to medium-term credit where returns reset more quickly in response to rates and inflation.
Price risk appropriately: With inflation and fiscal uncertainty still in play, prioritize structures with collateral coverage, covenant protections, and real visibility on cash flow.

Bottom Line

The market is still trading the ghost of 2019. But this is 2025. Financial conditions are loose, labor markets are tight, inflation risks are rising, and fiscal policy is expansionary. The Fed is in no hurry, and it shouldn’t be.

Sources: Sources: Reuters, Trading Economics, The Budget Lab (Yale.edu), Taxfoundation.org, Federal Reserve Bank of Chicago, Congressional Budget Office, Federal Reserve Bank of San Francisco, Federal Reserve Bank of Kansas City

About Stewards Investment Capital

Stewards Investment Capital is a boutique investment advisory firm with a track record of over 25 years under the Stewards Group of Financial Companies. Strategically positioned in Mauritius, South Africa, and the USA, we tailor niche investment solutions to high-net-worth individuals and institutional investors.

Guided by a high-alpha approach and fuelled by a passion to be a catalyst for growth, our commitment to our investors is rooted in our mission to grow and nurture their wealth, building lasting fortunes and creating enduring legacies to achieve real freedom. This endeavour is powered by our team of passionate investment professionals, each contributing decades of experience and expertise to our firm.

For further information about Stewards Investment Capital, please visit stewardsinvestment.com/

For more information please contact:

Suneeta Motala
Chief Marketing Officer
Forbes Communication Council Member

Email: suneetamotala@stewards.global, thestewards@stewards.global

T: (+230) 466 7533

Private Markets: Private Credit, Private Equity & Alternatives.

The Rise of Direct Lending and Asset-Backed Loans: Private Credit’s Growing Opportunity