By: Gustian Farrow, Head of StoneX TV • Content Channels
Kathryn Rooney Vera, StoneX Group Inc.’s Chief Market Strategist, analyzes how investors are interpreting Fed signals, fiscal risks, and the balance between valuations and earnings in today’s markets.
Markets are signaling that the Fed is close to neutral, with the dollar weaker, gold rallying, and Treasury yields easing. Rooney Vera explained that investors view the Fed as leaning dovish, with jobs prioritized even if inflation holds above 2%. “The Fed is leaning dovish defending labor stability while keeping an eye on inflation,” she noted. The dot plot points to 2 additional cuts in 2025, and Powell has said the dots should be viewed probabilistically rather than as a binary plan. In practice this means the Fed sees the odds of easing somewhat higher than holding, though still contingent on incoming data.
The 10-year yield reflects both short-rate expectations and the term premium, which turned positive this year as deficits lifted borrowing costs and is likely to remain higher than in prior cycles. Treasury supply decisions have provided near-term relief, with steady auction sizes and expanded buybacks, and tariff revenues running near a high annualized pace have temporarily reduced funding needs. “That’s helped the bond market in the short run, but if tariffs prove lasting they could mean higher prices,” she warned. Rooney Vera emphasized that investors should not mistake short-term relief for a change in structural fiscal pressure.
The Fed has little scope to cut aggressively with inflation still above target. Rooney Vera cited Cleveland Fed President Beth Hammack’s view that policy is mildly restrictive and near neutral, underscoring limited flexibility. Powell has signaled that risks are shifting toward employment, and the Committee’s 25 bp step toward neutral on September 17 reinforces a measured path. Easy financial conditions, reflected in a negative Chicago Fed National Financial Conditions Index, also argue against a rapid easing cycle. Cuts remain gradual unless labor data weakens meaningfully, and in that case the pace could shift quickly if employment deteriorates.
Valuations are elevated but supported by resilient earnings, consistent with Powell’s view that equities are highly valued without presenting immediate financial-stability risk. Markets usually roll over when a shock undermines fundamentals, not on valuation or duration of the bull market alone. Her strategy emphasizes selective rotation: trim concentrated, stretched exposures and reweight toward under-owned sectors and markets where starting points are more attractive. Government shutdowns typically dent sentiment rather than cause recessions, but today’s fiscal backdrop heightens the risk. In the past 45 years, about half of shutdowns coincided with S&P drawdowns of 5% or more. If furloughs turn into job losses, the employment mandate could push the Fed to ease faster than currently signaled. In this environment, investors must balance tactical curve positioning with a broader focus on resilience across asset classes.
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--- Written by Gus Farrow, Head of StoneX TV
--- Expert: Kathryn Rooney Vera, StoneX Chief Market Strategist
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