For the majority of 2025, investors have been hankering after multiple base interest rate cuts from Jerome Powell and the Federal Open Market Committee (FOMC), knowing it would kick-start cheaper borrowing and foster economic activity. The general consensus was that once the Fed was confident enough to start cutting, it would spell a change in the weather: a move toward the greatly anticipated “normalization” of the funds rate.

So when the FOMC cut in September, this apparent fact was not only baked in by markets, but so too were the cuts expected to come for the rest of the year.

Unfortunately, the economy is faring far better than many estimated—meaning the Fed may not be forced into further action as quickly as anticipated.

Markets continued to struggle yesterday—the third day in a row—with Deutsche Bank’s Jim Reid noting: “The main catalyst was a strong batch of U.S. data, which meant investors dialed back their expectations for rapid Fed rate cuts, and pushed front-end Treasury yields higher. So that meant rate-sensitive sectors like tech took a hit, with the Magnificent Seven dragging down the broader equity market.”

That sums up the counterintuitive position traders are in at the moment: when healthy economic data actually works against the sentiment of analysts and investors. The data this week should have reassured them: Weekly jobless claims fell to 218,000 for the week ended Sept. 20, and GDP increased at an annual rate of 3.8% for Q2 2025, according to a third estimate from the Bureau of Economic Analysis.

With the labor market softening (the economy added less than 30,000 jobs according to most recent data), analysts had hoped this would push the Fed to continue cutting. But with inflation—the pesky other side of the Fed’s mandate—remaining elevated at near 3% (ahead of its target at 2%) that gives the Fed just enough reason to remain cautious.

Kevin Khang, Vanguard’s senior international economist, wrote in a note seen by Fortune this week: “It’s no surprise that every hint of a dovish Fed pivot is met with enthusiasm. But two realities about the yield curve—and the broader rate environment—are worth keeping in mind.

“First, the short end of the curve will continue to be shaped by the Fed’s dual mandate of ensuring both price stability and maximum sustainable employment. Although inflation has come down meaningfully from its peak, it remains sticky. This is partly due to supply-side forces, including tariffs and an immigration slowdown.

“At the same time, the labor market, though showing signs of softening, remains in balance by historical standards. These dynamics suggest that the Fed’s path to sustained rate cuts is narrow. With inflation poised to remain above its 2% target for a fifth consecutive year, the Fed is unlikely to ease the policy rate substantially—unless inflation somehow makes a more decisive move toward target sooner.”

The longer view

Undeterred by data suggesting the contrary, investors have continued to bank on a further cut coming in October. According to CME’s FedWatch barometer, investors are still banking on a 87.7% chance of a further 25 bps cut in the October meeting.

Indeed, members of the FOMC have been signaling that while further cuts could be to come, anything beyond a meeting-to-meeting approach would be an error. As Mary Daly, president of the San Francisco Fed, said in a speech Wednesday: “Moving forward, it is likely that further policy adjustments will be needed as we work to restore price stability while providing needed support to the labor market … But these are projections, not promises, and making good decisions will require us to anchor on our objectives, assess the tradeoffs, and decide, again and again.”

This steady approach was echoed by Chair Jerome Powell, who was given the nickname “Too Late” by the Oval Office, courtesy of his cautious approach to easing. But speaking in Rhode Island this week, Powell stuck by his measured approach: “Our policy is not on a preset course. We will continue to determine the appropriate stance based on the incoming data, the evolving outlook, and the balance of risks. We remain committed to supporting maximum employment and bringing inflation sustainably to our 2% goal.

“Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country.”

Here’s a snapshot of the markets ahead of the opening bell in New York this morning:

• S&P 500 futures were flat this morning. The index closed down 0.5% in its last session.
• STOXX Europe 600 was up 0.31% in early trading. 
• The U.K.’s FTSE 100 was up 0.37% in early trading.
• Japan’s Nikkei 225 was down 0.87%.
• China’s CSI 300 was up 0.6%.
• The South Korea KOSPI was down 2.45%.
• India’s Nifty 50 was down 0.91% before the end of the session.
• Bitcoin declined to $109.7K.