Is the Fed About to Cut Rates Too Soon?

With markets at all-time highs and inflation showing signs of cooling, investors are increasingly confident that the Federal Reserve will cut interest rates as early as this month. The tone from the Fed has indeed shifted. Recent commentary suggests that many officials are becoming more open to the idea of easing.

But just because the market wants a rate cut, and the Fed is softening its language, does not mean the timing is right.

Signs of economic softening

On the surface, the U.S. economy appears to be holding up. Unemployment is still low, consumer spending has not collapsed, and earnings season has not been disastrous. But under the surface, cracks are forming.

Business confidence is slipping. Forward outlooks from major corporations have been revised down. Manufacturing and services data have weakened. And importantly, hiring is slowing in key sectors. This makes the case for rate cuts stronger, but not necessarily urgent.

The monetary backdrop matters

There is a major disinflationary force quietly shaping the macro environment: the contraction in money supply.

Broad money supply has been declining for the first time in decades. This development is rarely discussed in the mainstream narrative, but it matters. Lower money supply typically results in lower inflation pressure, even when employment is strong.

This could explain why inflation has steadily cooled despite relatively healthy consumption and labor markets. If the Fed cuts rates into a backdrop of shrinking liquidity, it may not fuel runaway inflation. Any price spikes would likely be short-term, not structural.

Tariffs complicate the picture

There is another critical variable: Trump’s tariffs.

In April, Trump laid out a new global tariff framework, and it spooked the market. Stocks dropped over 20 percent on the initial announcement. Since then, markets have rallied back as Trump’s rhetoric softened and "deals" were announced. But now, final tariff implementation is set to begin on August 1st.

The difference this time? Nobody believes him. The market is pricing in the assumption that these tariffs are empty threats.

But what if they are not?

If the Fed cuts rates right before tariffs go into effect, it would be stimulating the economy at the same time Trump is introducing new cost pressures. That is a dangerous mix. Rising import costs could push inflation temporarily higher. It might have been better for the Fed to wait and see if the tariffs are just another paper tiger or a real shift in trade policy.

Markets are acting like nothing can go wrong

Stocks are setting new highs. The VIX is low. Credit spreads are tight. Investors are positioned for continued upside.

But when everything feels calm, that is when risk builds.

The disconnect between market optimism and real policy risk is growing. If tariffs do hit and inflation bounces temporarily, the Fed’s cut could look premature. Worse, it might fuel another round of mispricing in both bonds and equities.

Investment strategy moving forward

From an investment perspective, this is not the time for blind risk-taking. There are opportunities, especially if the Fed executes a well-timed cut and inflation remains subdued. But there is also significant downside risk if the market has misjudged the policy landscape.

Watch bond market signals closely. Be aware of how inflation data behaves around the tariff implementation date. Positioning defensively into the event, then reassessing, may be a smarter strategy than chasing highs into uncertainty.

And most importantly, understand the bigger picture: rate cuts in a structurally tightening liquidity environment are not inherently inflationary—but timing still matters.

Do not consider this article as financial advice. We only showcase our own opinion. Always do your own due diligence before investing in any alternative investment opportunities.