Here’s a breakdown of the likelihood of another Federal Reserve rate cut and what that could mean for markets:
✅ Probability of Another Rate Cut
Market-based tools (like the CME Group FedWatch Tool) show ≈ 90%+ probability of a 25-basis-point cut at the next meeting (late October 2025).
Futures markets are also pricing in ~70–80 basis points of total cuts in 2025 after the already-announced September cut.
While a cut is very likely, there’s uncertainty about magnitude and timing beyond the next meeting; the Fed emphasizes it’s not on a “preset path.”
📊 Market Outlook Given Another Rate Cut
What the market is likely to do
Stocks: Growth stocks (especially tech and long-duration names) and rate-sensitive sectors (housing, REITs) may rally as borrowing costs decrease and future earnings look more valuable.
Bonds: Short-term yields should fall as the policy rate is cut; long-term yields may fall too if growth/ inflation fears dominate, which means bond prices rise.
U.S. Dollar: Likely to weaken somewhat — lower short-term interest rates reduce foreign-investor demand for USD-denominated assets.
Gold & safe assets: Could benefit as real yields (nominal yields minus inflation) drop, enhancing the appeal of non-yielding but inflation/allocation assets.
Commodities: May get a boost, especially if the cut is seen as pre-emptive and supports growth; but if the cut signals deepening economic weakness, commodities may falter.
Potential caveats & risks
If the cut is seen as a signal of economic weakness (rather than confidence) — e.g., labor market weak, growth faltering — then markets may start to worry about earnings declines and recession risk, which could offset the initial positive reaction.
If inflation remains sticky, the Fed may highlight caution about further cuts; growth/tech may lag if rate cuts appear insufficient to stimulate.
The magnitude of reaction may depend on communication: how the Fed frames forward guidance matters as much as the cut itself.
M2 money supply is at an all-time high (or reaching record levels), that’s a meaningful macro signal. Whether it’s “good” or “bad” depends heavily on other factors (velocity of money, inflation, growth, how the Fed responds). Here’s how to think about it, and what it could imply for markets:
🔍 What M2 Captures & Why It Matters
Definition: M2 is a broad monetary aggregate that includes currency in circulation, checking deposits, savings accounts, time deposits under $100,000, and certain money market funds.
Liquidity gauge: Because M2 includes funds that are relatively liquid, a high M2 signals there’s a lot of money “in the system” that could be deployed into spending, investment, or asset markets.
Theoretical link to inflation: Classic monetary theory (e.g. the Quantity Theory of Money) suggests that increases in money supply, if velocity is stable or rising, tend to lead to inflation—i.e. “too much money chasing too few goods.”
But in practice, that link is messy because velocity, credit conditions, and demand matter too.
⚠️ Caveats / Moderating Factors
Velocity of money is often declining — money may increase, but people might hold it rather than spend it.
Credit constraints / risk aversion can inhibit money from circulating (i.e., banks may not lend, businesses not invest).
Time lags: Money supply changes may take months or years to show up in inflation, growth, or asset prices.
Policy reaction: If inflation surprises, the Fed can tighten (or delay cuts), pulling back some of the effect.
📈 Market Impacts of High M2
If M2 is indeed at a record high, here are the likely ripple effects across markets (assuming other conditions like some inflation pressure and a somewhat stable growth environment):
Market Segment
Expected Reaction / Risk
Why
Equities (growth, small-cap, cyclical)
Positive tailwind
More liquidity → more capital chasing returns → supports risk assets
Real estate / REITs
Favorable
More money available for mortgage credit or property investment
Markets may price in inflation, reducing bond prices
Dollar (FX)
Potential weakening
More money supply can devalue currency if inflation expectations shift upward
🧭 What It Means for the Fed and Policy
A high M2 gives the Fed less room to cut aggressively, because too much money in the system already threatens inflation overheating.
The Fed may lean more cautiously or even hold rates or tighten if inflation surprises upward.
If the Fed does cut, markets may interpret cuts more as acknowledging growth weakness rather than easing inflation — less uplift than expected.
Looking at recent data, there is support for the idea that the high M2 is pushing (or at least exerting pressure on) inflation, but it’s not a perfect one-to-one relationship. The relationship shows up more strongly over longer lags. Here’s what I found and how to interpret it:
📊 Recent M2 Growth & Inflation Metrics
Here are some specific figures and observations from recent data:
M2 Level & Growth
M2 (seasonally adjusted) in August 2025 was about $22,195.4 billion (≈ $22.20 trillion)
Over the past year, M2 has grown ~ 4.77% year over year
Month over month (Aug vs Jul) it rose by ~0.36%
Inflation / Price Metrics
The chart from LongTermTrends plots historical yearly M2 growth vs CPI inflation, showing that over many periods, M2 growth and inflation tend to move together (though with lag)
The St. Louis Fed’s analysis notes that historically, inflation has “followed” M2 growth with a lag (often 6–18 months), consistent with monetarist views.
The St. Louis Fed also emphasizes that the relationship has “long and variable lags” — meaning M2 expansion doesn’t immediately translate into inflation, but over time the pressure builds.
Recent Observations & Commentary
Some sources note that M2’s annual growth approaching ~5% is concerning, historically, from an inflation risk standpoint.
Finance sites report that M2 reached record highs (i.e. “U.S. M2 money supply hits record high of nearly $22T”) which underscores the magnitude of liquidity in the system.
🧠 Interpretation & What It Suggests
Putting those facts together, here’s how to interpret the signal:
Lagged inflation risk is likely elevated The high M2 growth suggests there is more liquidity in the system. If velocity (the rate at which money circulates) picks up or remains stable, that liquidity can translate into demand-pull inflation. Because past studies show lags, inflation pressures may intensify in coming quarters.
If inflation is already sticky, M2 adds fuel Given that inflation hasn’t fully normalized and there are ongoing pressures (trade, tariffs, labor costs), the elevated M2 offers more “ammunition” for inflation rather than being easily absorbed.
Not a guarantee — context matters The fact that M2 growth is high doesn’t force inflation; other factors like weak demand, high capacity, tight credit, or falling velocity can mute the effect. Indeed, many economists argue that in modern banking/financial systems, the direct linkage between money aggregates and inflation is weaker than classical monetarist theory suggested.
Policy constraints increase With M2 high, the Fed has less room to “loosen up” without risking overheating. If inflation surprises upward, the Fed might delay cuts or even tighten further — which creates more tension for markets.
✅ Bottom Line
A record-high M2 isn’t inherently bad — it could support growth and asset markets if other conditions are favorable.
But it raises a caution flag: the more money there is, the more sensitive markets become to inflation surprises or monetary tightening.
In the current climate — sticky inflation, weak labor, geopolitical risks — a high M2 elevates the stakes.
Here’s what the latest U.S. unemployment trend looks like, and how markets reacted to the most recent report:
📈 What the Unemployment Data Shows
The unemployment rate in August 2025 rose to 4.3%, up from 4.2% in July.
Labor force participation and the employment-population ratio have stayed relatively stable month to month, though both are down somewhat over the past year.
Nonfarm payrolls showed weak job growth (only ~22,000 jobs added in August), and recent data revisions have cut previous job growth estimates significantly downward.
Long-term unemployment (those unemployed 27 weeks or more) is elevated (around 1.9 million), and makes up over 25% of all unemployed workers.
⚙️ How Markets Reacted
After the weak jobs/unemployment print, bond markets rallied — short-term Treasury yields dropped, as investors increasingly believe the Fed will need to ease policy.
Stocks had a mixed reaction: some gains in rate-sensitive sectors (like tech and growth) because a weaker labor market increases the odds of rate cuts, but also concern in more cyclical sectors over weakening demand.
The weak jobs report increased market expectations for future rate cuts from the Fed. Analysts & firms revised forecasts to anticipate easier monetary policy in coming Fed meetings.
🔍 What This Suggests Going Forward
The elevated unemployment rate plus weak job additions suggest that the labor market is cooling. Because the jobs picture is one of the Fed’s two mandates (the other being inflation), these trends push monetary policy toward being more accommodative. Markets are likely to expect:
Further rate cuts (but likely gradual, depending on inflation data)
Continued cautious investor behavior — sectors dependent on strong demand may be under pressure
Increased volatility around economic releases (jobs, inflation) as they’ll be seen as key indicators for Fed actions
Here are recent estimates showing how likely markets think further Fed rate cuts are, based on futures & other data:
Smaller chance; often seen as less likely for a bigger move. (Morningstar)
By end of 2025
Markets are expecting multiple cuts; total cuts priced in are ~70 bps. (Reuters)
But large, back-to-back cuts (50 bps each time) are seen as less likely. (Morningstar)
Here’s a summary of how market expectations (via CME FedWatch and related tools) for Fed rate moves have shifted recently — especially in light of weak jobs + inflation data:
Seen as unlikely but rising slightly — a “dovish surprise” scenario.
End of 2025 (Dec meeting)
~ 75-80% chance that target rate will be ~ 3.50-3.75% (i.e. another cut or two beyond September) (Investing.com)
Was lower earlier in the summer; markets have been shifting toward more cuts priced in. (Investing.com)
Reflects growing consensus that loosening is likely as economic data cools.
⚙️ Interpretation
These shifts show markets rapidly adapting to softer economic signals — especially weak job growth and downward revisions.
The nearly-certain expectation of a 25 bps cut in September suggests that new data is no longer enough to shift odds away from that outcome.
The possibility of a larger cut (50 bps) has increased slightly, but remains low — viewed more as a potential tail-risk if conditions deteriorate further.
By late 2025, markets expect more easing (i.e. one or more additional cuts), though how many and how big depends heavily on inflation and jobs trajectories.
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