In the high-stakes world of global markets, the U.S. stock market has been on a tear, adding a staggering $14 trillion in value since April lows, with the S&P 500 surging 32%. This rally, as highlighted in a recent Bloomberg analysis, is largely fueled by investor anticipation of Federal Reserve interest rate cuts resuming after a pause. Traders are betting on the Fed’s upcoming September 17-18 meeting to deliver the first cut of 2025, but the big question looms: What if the central bank opts for a modest 25-basis-point (0.25%) trim instead of the deeper reductions some, including President Donald Trump, are advocating? For energy investors, the ripple effects could be profound, influencing everything from drilling costs to commodity prices.
The Market’s Fed Cut Playbook: What Investors Are Betting On
The Bloomberg piece delves into what it calls the “Fed cut playbook,” drawing on historical data from Ned Davis Research dating back to the 1970s. When the Fed resumes cuts after a prolonged pause of six months or more—like the current scenario—the S&P 500 has historically delivered an average 15% gain in the year following the first cut. This compares to a more modest 12% average return in typical easing cycles. Investors are poring over this playbook, viewing the anticipated cuts as a signal of economic normalization rather than distress.
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Current market pricing reflects near-certainty for action at the September meeting. According to the CME Group’s FedWatch Tool, there’s a 93% probability of a 25-basis-point cut, bringing the federal funds rate down from its current 4.25%-4.50% range to 4.00%-4.25%.
Beyond that, expectations are for a gradual path: A Reuters poll of economists shows 60% anticipating a total of 50 basis points in cuts by year-end, while 37% see 75 basis points. Major banks like Morgan Stanley and Deutsche Bank align with this, forecasting three 25-basis-point reductions across the remaining 2025 meetings—September, November, and December.This measured approach stems from mixed economic signals: a cooling labor market with job growth slowing to its weakest since 2020, juxtaposed against sticky inflation hovering around 2.9% in August.
The Fed’s dilemma is clear—cut too aggressively, and it risks overheating prices; hold back, and recession fears could mount. Markets, however, have largely priced in the baseline 25-basis-point move, with futures implying about 75 basis points total for the year.
Trump’s Aggressive Push: Calling for Deeper, Faster CutsPresident Trump has been vocal in his criticism of Fed Chair Jerome Powell, repeatedly urging immediate and substantial rate reductions. Just days ago, Trump reiterated his demand for a “big rate cut now,” echoing his long-standing view that high rates are stifling growth and hurting sectors like housing. He has even floated slashing rates to as low as 1%, claiming Powell’s policies are “hurting the housing industry very badly.”
This pressure has intensified amid Trump’s broader influence on Fed appointments, with two board seats in limbo as he seeks to shape monetary policy more directly.
Trump’s stance contrasts sharply with the Fed’s data-dependent ethos, raising concerns about the central bank’s independence. Analysts warn that overt political meddling could erode investor confidence, potentially leading to market volatility if cuts appear dictated by the White House rather than economic fundamentals. Yet, in the short term, Trump’s rhetoric aligns with bullish sentiment, as his pro-growth agenda— including tariffs and deregulation—could amplify the stimulative effects of lower rates.
Small Cuts vs. Large Cuts: Market Reactions and Risks
A 25-basis-point cut in September would align with the market’s baseline expectations, likely extending the rally by easing borrowing costs and boosting liquidity. Historically, even modest easing has been positive for equities, as it signals the Fed’s readiness to support growth without panic. Lower rates make stocks more attractive relative to bonds, potentially pushing the S&P 500 toward new highs, with sectors like technology and consumer discretionary leading the charge.
However, if the Fed delivers only incremental 25-basis-point trims—perhaps totaling just 50 basis points by year-end—instead of the 75-100 basis points some hawks desire, disappointment could set in. Investors might interpret this as a sign of persistent inflation or economic resilience, leading to a “sell the news” pullback. Business Insider notes that while rate cuts generally loosen financial conditions and support stock prices, a tepid pace could fuel worries about a “bubble” in overvalued assets, prompting short-term jitters or a 5-10% correction. In extreme scenarios, if cuts are delayed or smaller than signaled, volatility could spike, reminiscent of 2019 when Fed pauses led to sharp drawdowns.On the flip side, larger cuts—say, 50 basis points in September or a rapid descent toward 3% by mid-2026—would supercharge the rally, potentially delivering 15-20% gains as per the historical playbook.
But this aggression carries risks: It could stoke inflation, especially with Trump’s proposed tariffs adding upward pressure on prices, forcing the Fed into a reactive hiking cycle later. Yahoo Finance highlights that while deep cuts are “great for the stock market” in theory, they often signal underlying weakness, which could cap upside if recession odds rise.
Energy Sector Implications: Borrowing Costs, Demand, and Commodities
For the energy sector, a Fed cut—regardless of size—typically acts as a tailwind by reducing financing costs for capital-intensive projects like oil exploration and renewable infrastructure. A modest 25-basis-point move would provide marginal relief, lowering the cost of debt for companies like ExxonMobil or Chevron, potentially boosting capex in shale plays or LNG exports. However, with oil prices volatile amid geopolitical tensions and slowing global demand, small cuts might not be enough to ignite a sector-wide surge.
Larger cuts, aligned with Trump’s vision, could be more transformative. Cheaper borrowing would accelerate investments in U.S. energy dominance initiatives, such as Permian Basin drilling or clean energy transitions under the Inflation Reduction Act. BlackRock’s analysis suggests that 2-3 cuts in 2025 could enhance portfolio returns in energy ETFs, as lower rates correlate with higher commodity demand from stimulated economic activity. Yet, inflation risks loom large: Energy prices, a key CPI component, could face upward pressure from supply constraints, complicating the Fed’s path and hitting energy stocks if rates stay higher for longer.
In a scenario of underwhelming cuts, energy firms might face headwinds from persistent high rates squeezing margins, especially for high-debt renewables developers. Conversely, aggressive easing could draw capital back to cyclicals like oil majors, outperforming the broader market.
So why are we here? Mohsin ends her essay noting the elephant in the room: The president himself wants lower rates. Authers argues that the best critiques of the Fed require politicians to confront hard decisions, like how to balance inequality and growth.
But don’t forget the backdrop: The Fed is an expert institution in an anti-expert and anti-institutional age. In 2001, 74% of Americans had confidence Alan Greenspan would do the right thing, according to Gallup. In 2025, 37% have confidence that Powell will.
Trust in the president and in Congress has fallen over that period, too. But in 2025, for the first time in their tenure together, more Americans have confidence in Trump to do the right thing for the economy than they do in Fed chair Jerome Powell. That does not bode well for Fed independence.
— Walter Frick, Bloomberg Weekend
Navigating the Uncertainty
The $14 trillion rally hangs in the balance as the Fed’s September decision approaches. A quarter-point cut would keep the party going but might underwhelm those expecting bolder action, potentially leading to volatility that tests investor resolve. Trump’s push for deeper cuts adds political drama, but the Fed’s commitment to independence suggests a cautious path ahead. For energy investors, the key is diversification: Position for lower rates, boosting demand while hedging against inflation-driven commodity swings. As markets await Powell’s words, one thing is clear—the playbook is being rewritten in real time.
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