Rate cut does not equal good news? JP Morgan warns: If the Federal Reserve is pressured by politics, market risks will rise sharply.

David Kelly, chief global strategist at J.P. Morgan Asset Management, said that if the Fed's interest rate cut expected by the market this week is seen as succumbing to political pressure and contradicting the Fed's own economic forecasts, it will increase the risks faced by the stock market, bond market, and the US dollar. Prior to this, the Fed had paused rate cuts for 9 months, and bond and equity investors on Wall Street had been eagerly anticipating a 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 diversification in investments after recent market gains. At the end of May, the yield on the 10-year US Treasury bond once approached 5%, but with signs of weakness in the US labor market, the expectation of a 25 basis point rate cut this month has solidified, and there are expectations of a series of rate cuts next year. Currently, the yield has fallen to around 4%. At the same time, US stocks have seen a $14 trillion market value increase, with major stock indices hitting historic highs this month. Kelly said, "If the Fed's rate cut decision this week is seen as bowing to political pressure, then the US financial markets and the US dollar will face a new layer of risk." He believes that "the current market is showing signs of a bubble," and that implementing loose policies at this time will not only fail to boost demand but may suppress it, "ultimately having a negative impact on the stock market, bond market, and the US dollar." Since the initial sell-off triggered by Trump's announcement of large-scale tariff measures on April 2, investors who have allocated their investments in a combination of stocks and bonds have seen substantial gains. Indexes show that the so-called "60/40 investment strategy" (60% allocated to stocks, 40% allocated to bonds) has achieved a return of about 20%. As of last Friday, US Treasury bonds have gained 5.6% so far this year. At the same time, the Bloomberg US Dollar Index, after hitting its lowest point since 2022 in early July, has now stabilized. It is worth noting that Kelly is not the only analyst predicting that the record-breaking stock market rally may stall due to the Fed rate cuts. Strategists from Morgan Stanley, J.P. Morgan, and Oppenheimer Asset Management have also issued warnings, as investors shift their focus to potential economic slowdown, the previous optimistic sentiment in the market may be replaced by a more cautious atmosphere. Although Kelly agrees with the market's judgment that the Fed will implement loose policies, he believes that the Fed lacks sufficient basis for its inflation forecasts to support a rate cut decision. He expects that in the latest quarterly forecasts to be released on Wednesday, officials may only slightly revise down their forecasts for the labor market, 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 above the target and stable. In this scenario, why would the Fed still need to cut rates?" For months, Trump has been pressuring Fed Chairman Powell to cut rates this year. Last Sunday, he told reporters that he expects a "substantial rate cut" this week. When Fed officials voted in July to keep rates unchanged, Fed governors appointed by Trump, Waller and Bowman, voted against it. Waller is one of the candidates considered most likely to succeed Powell as Fed Chairman, and he has consistently downplayed concerns about inflation triggered by tariffs, while emphasizing the problems increasingly evident in the labor market. Kelly said, "If the members of the Federal Open Market Committee (FOMC) can ignore pressure from the government and their peers, this rate cut decision is likely to trigger multiple opposing views on both sides."