-
The economy may not be able to count on Fed rate cuts to give it a lift, JPMorgan’s David Kelly says.
-
The chief global strategist of the bank’s wealth unit sees three reasons lower rates won’t boost growth.
-
The main reason the economy is slowing is due to uncertainty from tariffs and immigration, he said.
It’s possible that Fed rate cuts won’t save the day after all.
That’s definitely contrary to what many—including President Donald Trump—seem to think when it comes to Fed policy. Most are expecting lower borrowing costs to be a tailwind to growth and a backstop for an ailing job market.
But at least one top market expert says don’t count on it.
“We think we’re going to get some rate cuts out of this,” David Kelly, the chief global strategist at JPMorgan Asset Management, said, pointing to the recent uptrend in stocks despite a weak jobs report for August. “But that’s not going to fix anything.”
Fed rate cuts, which boost market liquidity and are usually bullish for risk assets like stocks, have been on the investors’ radar all year. Investors are pricing in a 100% chance the Fed is set to cut interest rates at its September policy meeting by at least 25 basis-points, according to the CME FedWatch tool.
But the logic could be backwards, Kelly said, speaking to CNBC last week. These are the three reasons he doesn’t see rate cuts helping the economic picture.
Cutting retiree income
Lowering interest rates could backfire for those who have already retired, Kelly said. Retirees tend to store a larger chunk of their savings in safer assets, like US Treasurys, which are tied to interest rates in the broader economy.
“The most important thing that I think the administration needs to realize is that, if you cut rates here, you’re going to cut the interest income of retirees,” Kelly said.
According to an analysis from the financial services firm Empower, investors in their 60s had the highest allocation to bonds of any age group, with an average of 13% of their portfolios held in fixed income.
Retiree spending, meanwhile, makes up a small but significant portion of US economic activity. Pension spending made up around 7.4% of GDP in 2023, according to data from the Organisation for Economic Co-operation and Development.
“You got all these people sitting on retirement income who are losing money because of lower — as short rates come down,” Kelly added.
Hesitant borrowers
Fed rate cuts are thought to rev up the economy by making capital cheaper for businesses and consumers. But the Fed jumpstarting its rate-cutting cycle might have the opposite effect, Kelly speculated, as borrowers will be incentivized to wait for interest rates to drop even more before taking out loans.
“You’re going to tell people that more rate cuts [are] coming. So, why borrow now? Let’s wait and see,” Kelly said.
Loan officers saw weaker demand for commercial and industrial loans for companies of all sizes, according to the Fed’s July Senior Loan Officer Opinion Survey.
60% of firms that worked with small businesses said that plans for capital investment were either “somewhat less optimistic” or “much less optimistic” compared to six months ago, according to a separate Fed survey of small business resource organizations.
Meanwhile, 47% of the organizations added that small business financing was either “somewhat harder” or “much harder” compared to six months ago. That was due to higher lending rates for small businesses, as well as higher fees for Small Business Administration loans, researchers at the Cleveland Fed wrote in a Fed Small Business note.
“I mean, the whole history of the 21st century is rate cuts don’t stimulate growth. They didn’t in any way after the Great Financial Crisis. So don’t look to the Fed to bail out the economy,” Kelly added.
Lingering uncertainty
Rate cuts don’t fix the main reason the US economy is slowing down.
That’s the “uncertainty tax” Americans are paying, Kelly said, pointing to how details are still unclear over the impact of tariffs and President Donald Trump’s immigration policy.
“Why is the Fed cutting rates? Because they think recession,” Kelly said of fear among businesses and consumers. “And that adds to the biggest tax that the government levies.”
The full effect of tariffs hasn’t been seen yet in the US economy, but businesses are already starting to feel some pain from higher import duties as they wait for trade agreements to materialize
47% of businesses in Texas surveyed by the Dallas Fed in August said they had already been negatively impacted due to higher tariffs. 39% said they saw a slight or significant decrease in profit margins, while 20% said they saw a decrease in production, revenue, and sales.
Meanwhile, 58% of employers said they were concerned about “potential staffing challenges” as a result of new immigration policies, according to a 2025 survey conducted by the law firm Littler.
“There is a level of uncertainty here which is just causing people to freeze. And that’s really what you’re seeing. You can see it in the hiring numbers. That’s the problem,” Kelly added. “When everyone decides to wait and see, what you see is not good.”
Kelly doesn’t have a recession as his base case, but the economy looks to be slowing, he said, though he noted that investors shouldn’t compare the ongoing slowdown to “mega-recessions” like the pandemic recession or the Great Financial Crisis.
“I think we’re going to avoid a recession. But I do think there’s some clarity and certainty about these polices that would make it easier for businesses to grow,” he added.
Read the original article on Business Insider