{"id":23341,"date":"2025-09-12T11:33:44","date_gmt":"2025-09-12T15:33:44","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-us\/?p=23341"},"modified":"2025-09-12T11:33:46","modified_gmt":"2025-09-12T15:33:46","slug":"six-rate-cuts-in-search-of-a-reason","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insights\/six-rate-cuts-in-search-of-a-reason","title":{"rendered":"Six rate cuts in search of a reason"},"content":{"rendered":"\n

\n If all goes as many expect next week, the Fed will kick off a monetary\n easing cycle that will lead to overnight borrowing costs just below three\n percent by the end of 2026, according to interest rate futures.\n <\/p>\n

\n Although the press often presents it as a momentous decision, whether the\n Fed cuts in September, October, or December is trivial in the long run, in\n our view. We feel quite confident the U.S. economy will not collapse if\n rates are held constant next week, nor will a rate cut usher in a golden\n age of prosperity. We think most investors realize that in an economy as\n dynamic and robust as the U.S., a few basis points for a few months likely\n amount to noise.\n <\/p>\n

\n Rather than timing, we think the real question is how the Fed is supposed\n to fix the suite of economic issues confronting the U.S. when all it has\n is a hammer and there is scarcely a nail in sight.\n <\/p>\n \n

No labor of love<\/h2>\n

\n Let\u2019s start with labor markets, the oft-cited reason the central bank\n needs to cut. We think it\u2019s clear that labor demand has fallen\n dramatically over the past three months. That\u2019s as evident in nonfarm\n payroll numbers as it is in private data sources such as the ADP and\n Institute for Supply Management employment surveys.\n <\/p>\n

\n But even as hiring slows, it\u2019s not clear to us how much lower overnight\n interest rates would help. Traditionally, rate cuts work by stimulating\n economic activity spurring companies to hire. One of the most important\n channels to spur growth is cash-out mortgage refinancing, but with nearly\n 60 percent of borrowers sitting with mortgages below five percent, that\n avenue is likely choked off for the foreseeable future.\n <\/p>\n

\n More broadly, the fall in labor demand is occurring as economic growth\n continues at a brisk pace. U.S. GDP increased 3.3 percent on an annualized\n basis in Q2 2025. If that\u2019s not sufficient to promote hiring, what level\n of growth would be required, and how could it be achieved in a\n non-inflationary way? With unit labor costs in the second quarter up 2.5\n percent year over year, it\u2019s hard to see how the Fed can spur growth and\n hiring without pushing the U.S. uncomfortably close to wage-driven price\n inflation.\n <\/p>\n

\n Rather than a general lack of economic activity, we think the key labor\n market drivers are technological change and a mismatch between corporate\n hiring needs and the existing labor pool\u2019s skills. Those long-term issues\n are unlikely to be fixed by the Fed easing overnight borrowing rates.\n <\/p>\n \n

Not so restrictive policy<\/h2>\n

\n Even if labor markets are a weak justification, Fed accommodation could be\n useful if other areas of the economy are suffering from restrictive\n policy. Looking around, however, we struggle to find signs of that:\n <\/p>\n