A more accommodative Fed stance is turning restrictive policy into a tailwind for equities, note Ninety One Portfolio Manager Alex Holroyd-Jones and Analyst Rebecca Phillips.
The Fed has flipped into risk-management mode, a subtle shift in language that carries major consequences for markets. “What looks like a technical recalibration is, in practice, a tailwind for equities,” said Alex Holroyd-Jones, Portfolio Manager at Ninety One.
Back in early summer, Powell struck a very different tone. Stronger-than-expected labour market data, constrained supply from tight immigration policies and tariff-driven inflation concerns all left him questioning whether policy was restrictive enough. With unemployment barely budging, he judged that “the economy is not performing as though restrictive policy were holding it back inappropriately.” In the Fed’s framework, these forces effectively pushed up the short-run neutral rate, r*, making policy appear less restrictive. That reduced the urgency to ease despite political pressure and helped justify a “wait and see” stance.
Fast-forward to now, and everything has changed.
On inflation, the fear was that tariffs would stoke a persistent upward pressure on prices. Yet the impact has been more protracted than expected. Companies have absorbed more of the costs, tariff collection has proved uneven, and consumers haven’t faced the kind of sustained shock that would risk de-anchoring inflation expectations. Together, this gives the Fed comfort that the inflation outlook is stabilising and upside risks abating.
On the labour market side, the July payrolls release and subsequent revisions showed that conditions were not as tight as earlier estimates suggested. Rebecca Phillips, Analyst, said, “with wage growth moderating and vacancies per unemployed worker falling, the data points to a labour market losing some of its earlier heat. That, in turn, raises the risk of a deeper downturn and potentially a recession.”
Taken together, these shifts suggest that the factors which led the Fed to view policy as having tightened over the summer are now moving into reverse. Tariff effects look less acute, labour tightness has eased, and inflation expectations remain anchored. The Fed now sees current policy settings as exerting a much stronger drag on the economy than before. In other words, the short-run neutral rate is lower, and the monetary brakes are therefore pressing harder than Powell thought just months ago. With these monetary headwinds and a fragile balance between supply and demand in the labour market, it is not surprising that we have seen the Fed’s focus shift towards defending against further weakness. Powell warned, “downside risks to employment are rising. And if those risks materialise, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” In our view, this is the Fed telling us it stands ready to act if job conditions deteriorate.
Phillips said, “for global markets, that is effectively a backstop, with the world’s biggest central bank joining the global easing party. Investors can take confidence that sharp labour-market weakness won’t be tolerated, which in turn reduces the probability of a hard landing. The Fed isn’t waiting for economic conditions to collapse; it’s showing willingness to lean against risks early.”
For risk assets, this is a powerful signal. “A central bank that acknowledges policy is already restrictive and is prepared to cushion the downside creates a supportive environment for risk-taking,” said Holroyd-Jones. For now, that adds up to a constructive backdrop for equities, particularly in growth-heavy sectors like technology, where earnings continue to grow in double digits, supported by the AI transition, potentially supporting the previous beneficiaries of US exceptionalism, at least in the short term. Meanwhile, the negative tail risk for the dollar may be diminishing as growth is supported and rate cuts reduce the interest burden, improving debt sustainability concerns, again, at least in the near term.
The brakes may be pressing harder on the economy than Powell once believed, but paradoxically, that is precisely why the Fed is keen to ease, and why the current Fed stance is a tailwind for markets.
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