Rate cut good news? JP Morgan warns: If the Federal Reserve is pressured by politics, market risks will skyrocket.

David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, said that if this week's widely anticipated interest rate cut by the Federal Reserve is seen as succumbing to political pressure and contradicts the Fed's own economic forecasts, it will increase the risks facing the stock market, bond market, and the U.S. dollar. The Federal Reserve has paused rate cuts for 9 months, and investors on Wall Street have been eagerly awaiting the resumption of rate cuts. However, Kelly pointed out in a report released on Monday that investors should change their attitude, adopt a cautious stance, and seek diversified investments after recent market rallies. At the end of May, the yield on the 10-year U.S. Treasury bond briefly approached 5%, but as signs of weakness in the U.S. labor market emerged, expectations for a 25 basis point rate cut this month have solidified, with expectations for a series of rate cuts next year. Currently, the yield has fallen to around 4%. At the same time, the U.S. stock market has seen $14 trillion in market value growth, with major stock indices hitting historic highs this month. Kelly said, "If the Fed's rate cut decision this week is seen as giving in to political pressure, then U.S. financial markets and the dollar will face a new layer of risk." He believes that the current market shows signs of being in a bubble, and that implementing loose policies at this time may not boost demand, but could instead suppress it, ultimately having a negative impact on the stock market, bond market, and the U.S. dollar. Since President Trump announced large-scale tariff measures on April 2nd, which initially led to a sell-off, investors who have allocated a mix of stocks and bonds have gained substantial returns. Relevant indices show that the so-called "60/40 investment strategy" (60% in stocks, 40% in bonds) has achieved a return of about 20%. As of last Friday, U.S. Treasury bonds have risen by 5.6% year-to-date. At the same time, the Bloomberg Dollar Index, after hitting its lowest point since 2022 in early July, has stabilized. It is worth noting that Kelly is not the only analyst predicting that the record-breaking stock market rally may come to a halt due to the Fed's rate cut. Strategists at Morgan Stanley, J.P. Morgan, and Oppenheimer Asset Management have also issued warnings, stating that as investors turn their focus to potential economic slowdown, the previous bullish sentiment in the market may be replaced by a more cautious atmosphere. Although Kelly agrees with the market's assessment that the Fed will implement loose policies, he believes that the Fed's lack of sufficient basis for their inflation forecasts to support a rate cut decision. He expects that in the latest quarterly forecasts that will be released on Wednesday, officials may only slightly lower their labor market expectations, while inflation forecasts will remain above the Fed's 2% target until 2027. Kelly wrote in the report, "By the fourth quarter of this year, the inflation rate may be 1.2 percentage points higher than the Fed's target, and still rising; while the unemployment rate is only 0.3 percentage points higher than the target, and remains stable. If this is the outlook, why would the Fed need to cut rates?" For months, President Trump has been pressuring Fed Chairman Powell to cut rates this year. Last Sunday, he told reporters he expects a "substantial cut" this week. When Federal Reserve officials voted in July to keep rates unchanged, Trump-appointed Fed board members Waller and Bowman voted against. Waller is one of the candidates considered most likely to succeed Powell as Fed Chairman, has downplayed concerns about inflation caused by tariffs, and has emphasized the growing issues in the labor market. Kelly said, "If members of the Federal Open Market Committee (FOMC) can ignore pressure from the government and their colleagues, this rate cut decision is likely to bring multiple opposing views from both sides."