September 8, 2025 • 9 mins
The US Federal Reserve is tipped to interest rates next week. What does this mean for markets, and why do rate expectations have such an impact on bonds?
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
Welcome to Fear and Greed Q and A, where we
ask and answer questions about business, investing, economics, politics, and more.
I'm Michael Thompson, and good morning Sean Aylmer.
Speaker 2 (00:14):
Good morning Michael, Sean.
Speaker 1 (00:16):
Today the question is what is the impact of a
potential rate cut in the United States? Now? The US
Federal Reservers tip to start cutting interest rates when it
meets on September sixteen and seventeen, so not long ago. Now,
after the latest jobs report showed almost no growth in hiring,
just twenty two thousand jobs and unemployment rising to four
point three percent, the highest in nearly four years. The
(00:39):
Fed is going to get fresh inflation data next week,
and the President's tariffs are expected to cause a spike,
but still markets are predicting a rate cut. So in
unpacking all of this, I'm going to ask you first
for a lesson, a lesson in bond yields, a lesson
(01:00):
in interest rate expectations and how rate expectations affect bonds.
Take it away.
Speaker 2 (01:08):
There was no need to ask. There was no need
to ask. It was always coming. Might later on just
talk about why we might not get a rate cut
next week. But just part that for the moment. Okay,
bond rates, why do they matter? Because they are the
almost risk free rate of an investment return. Putting your
money in a US government bond is pretty much as
(01:30):
safe as it gets, safer than a bank, same with
an Australian government bond, with an Australonia going bond, that's
safer than the Commonwealth Bank, for example. Because these are
the almost risk free rate of investment returns, all other
asset classes that might be a bank deposit, might be
a share in a bank, It might be a higher
(01:52):
risk corporate bond, it might be a junk bond. What
they return, what they yield for your one hundred dollars
that you're putting into them or million dollars you're putting
into them, are all based off the bond rate because
there's a risk premium added to each of those. That's
why bond rates are so very very important. So when
(02:12):
a bond rate moves, so does everything else. The expectation
of return, inequity moves, expectation of corporate bonds move really
really significant. You're with me so far, Michael, You're loving.
Speaker 1 (02:23):
It so far. So far, I am enjoying this. Please
go on.
Speaker 2 (02:26):
Right, A. Bond rates You know what they reflect, don't you, Michael?
You said it in the intro. You've been learning expectations
of future interest rates. Get a bit technical here, but
if investors think interest rates are going to fall, which
they do in the US at the moment, then they
(02:47):
tend to buy more bonds because the bond might be
yielding four percent. Interest rates are going to fall, so
they think they're going to yield less. Therefore they jump in,
they buy more of them now for the yield falls,
making sense, got it? When you buy more of something,
what happens The price goes up. So it's almost kind
(03:09):
of doesn't kind of sound logical. But when investors demand
bonds when there's a rally in the bond market, yields
four So you've got to keep that in mind. Ye,
your question, there's my lesson. Did you like it?
Speaker 1 (03:27):
I did? It feels like that was just all context.
That was just so far. We've spent three and a
half minutes on context now.
Speaker 2 (03:36):
But it's so exciting these bond markets, Okay.
Speaker 1 (03:40):
And it matters. So this is the thing it is,
doesn't that vitally important to understand that? And so now
we can all say, yep, everyone can pass a test.
If you were to test us on it now, please
roll on.
Speaker 2 (03:50):
So the question what happens if the Fed cuts interest
rates next week? Is it next week?
Speaker 1 (03:56):
It is next week, next sixteenth, and seventeenth, and next week.
Speaker 2 (04:01):
Unfortunately, the answer is probably not much. But there's a
really good reason for that, because the market likes to
be informed and so most of the movement occurs before
the action actually happens. So what you've seen is bond
nils falling in the US because people think the Fed's
going to cut interest rates next week. The action has
(04:22):
already occurred in daily investing. Right, you get an economic
data point you mentioned the twenty two thousand US jobs
report really weak, people think, ooh, the Fed needs to
lower interest rates to boost the economy, to help the
labor market. That's why we've seen bond yils fall in
recent days. You might get other data coming out like
(04:44):
inflation that you mentioned. If that's higher than expected, you
may actually find bond nils rising. So day to day
investors take a punt based on this economic data on
what future interest rates will be, and that's reflected in
bond yields. It's why investors hate it so much when
(05:06):
what is supposed to happen doesn't happen, right, So the
best example we had of that was the Reserve Bank
meeting before last last meeting. They cut rates the one
before they were supposed to cut rates and didn't. That's
when markets move because they say, hold on, we expected
(05:29):
this to happen. We thought that interest rates were going
to fall. We traded so bond yields would fall. It
didn't happen. Markets do not like that, Michael at all.
Speaker 1 (05:40):
So when we were talking about it before, saying the
expectation is that the Fed will cut rates, but you
said that there's a case for why they may not
cut rates, and as part of that tied to that
inflation data out next week.
Speaker 2 (05:55):
Yeah. I mean, if that inflation data shows that the
tariffs are causing US bike in inflation, well, plenty of
reason to not cut interest rates. One thing about the tariffs,
it's like a one off spike though it's not ongoing,
but it is still a spike. Also, some analysts reckon
(06:17):
that financial conditions in the US are pretty loose, the
economy is pretty resilient. I mean, you look at the
share market when you've got that going on, and the
lending rate at the moment, at the benchmark rate is
not particularly restrictive. Do you really need to cut interest rates?
(06:37):
It's sort of the reason you might do is because
Team Trump says you've got to cut interest rates, and
our Federal Reserve Chair deraon Pale has been fantastic in
standing up for the Fed, while others have fallen, I mean,
not through their own needs, but the pressure from Donald Trump.
I suppose that fear is that if jeraon Pale does
(06:59):
cut interest rates, and the Fed does cut interest rates,
then it's going to be sort of a bit of
a well, we're doing this for Donald Trump, so rock
in a hard place for the Fed. If it does
do it, it's going to be blamed for following Donald Trump.
If it doesn't do it, it's going to be blamed
for curbing the economy. The markets reckon there'll be a
rate cut, but it's no sure thing, definitely sure thing.
Speaker 1 (07:22):
If it does. What does it mean then for Wall Street?
For share markets markets?
Speaker 2 (07:28):
I mean, Wall Street's just booming, and Wall Street should
increase if it cuts rates. If it doesn't cut rates,
that makes it more interesting because Wall Street will fall
that there's been a bunch of leading investment banks over
the past couple of weeks coming out and saying historically,
Wall Street is trading a game. I'm getting a bit
(07:50):
technical here, but I think they're saying about twenty seven
times earnings. Normally it trains at sixteen times earnings. Don't
worry too much about what the times earnings means. Normally
at sixteen's at twenty seven, it's extremely expensive at the moment.
Any bad news as in high inflation, no interest rate
caun't you could well see a correction in Wall Street coming,
(08:13):
and many investment banks thinks that that will actually happen.
It's kind of the price for price to perfection. So
if things aren't perfect, there could be some troubles.
Speaker 1 (08:23):
All right. I think we have comprehensively covered that, and
I love the fact that you gave. You gave so
much detail in all of that. And I contributed one
piece of information in there where I said that the
FED was meeting sixteen seventeen of September, end of next week.
It's Tuesday and Wednesday of next week. So I had
one job one job in that short but I've corrected
(08:47):
the record now, so everything is okay, all this weeking Heaven.
Thanks very much, Sere that we did a great job.
Thanks Michael, indeed was a joint Davitt. If you've got
something that you would like to know, then please send
through your question. We are very happy to dig into it.
Send it through you on LinkedIn, Instagram, Facebook, or at
Fearangreed dot com dot au. I'm Mark Thompson and this
is Fear and Greed Q and a H.
Welcome to Fear and Greed Q and A, where we
ask and answer questions about business, investing, economics, politics, and more.
I'm Michael Thompson, and good morning Sean Aylmer.
Speaker 2 (00:14):
Good morning Michael, Sean.
Speaker 1 (00:16):
Today the question is what is the impact of a
potential rate cut in the United States? Now? The US
Federal Reservers tip to start cutting interest rates when it
meets on September sixteen and seventeen, so not long ago. Now,
after the latest jobs report showed almost no growth in hiring,
just twenty two thousand jobs and unemployment rising to four
point three percent, the highest in nearly four years. The
(00:39):
Fed is going to get fresh inflation data next week,
and the President's tariffs are expected to cause a spike,
but still markets are predicting a rate cut. So in
unpacking all of this, I'm going to ask you first
for a lesson, a lesson in bond yields, a lesson
(01:00):
in interest rate expectations and how rate expectations affect bonds.
Take it away.
Speaker 2 (01:08):
There was no need to ask. There was no need
to ask. It was always coming. Might later on just
talk about why we might not get a rate cut
next week. But just part that for the moment. Okay,
bond rates, why do they matter? Because they are the
almost risk free rate of an investment return. Putting your
money in a US government bond is pretty much as
(01:30):
safe as it gets, safer than a bank, same with
an Australian government bond, with an Australonia going bond, that's
safer than the Commonwealth Bank, for example. Because these are
the almost risk free rate of investment returns, all other
asset classes that might be a bank deposit, might be
a share in a bank, It might be a higher
(01:52):
risk corporate bond, it might be a junk bond. What
they return, what they yield for your one hundred dollars
that you're putting into them or million dollars you're putting
into them, are all based off the bond rate because
there's a risk premium added to each of those. That's
why bond rates are so very very important. So when
(02:12):
a bond rate moves, so does everything else. The expectation
of return, inequity moves, expectation of corporate bonds move really
really significant. You're with me so far, Michael, You're loving.
Speaker 1 (02:23):
It so far. So far, I am enjoying this. Please
go on.
Speaker 2 (02:26):
Right, A. Bond rates You know what they reflect, don't you, Michael?
You said it in the intro. You've been learning expectations
of future interest rates. Get a bit technical here, but
if investors think interest rates are going to fall, which
they do in the US at the moment, then they
(02:47):
tend to buy more bonds because the bond might be
yielding four percent. Interest rates are going to fall, so
they think they're going to yield less. Therefore they jump in,
they buy more of them now for the yield falls,
making sense, got it? When you buy more of something,
what happens The price goes up. So it's almost kind
(03:09):
of doesn't kind of sound logical. But when investors demand
bonds when there's a rally in the bond market, yields
four So you've got to keep that in mind. Ye,
your question, there's my lesson. Did you like it?
Speaker 1 (03:27):
I did? It feels like that was just all context.
That was just so far. We've spent three and a
half minutes on context now.
Speaker 2 (03:36):
But it's so exciting these bond markets, Okay.
Speaker 1 (03:40):
And it matters. So this is the thing it is,
doesn't that vitally important to understand that? And so now
we can all say, yep, everyone can pass a test.
If you were to test us on it now, please
roll on.
Speaker 2 (03:50):
So the question what happens if the Fed cuts interest
rates next week? Is it next week?
Speaker 1 (03:56):
It is next week, next sixteenth, and seventeenth, and next week.
Speaker 2 (04:01):
Unfortunately, the answer is probably not much. But there's a
really good reason for that, because the market likes to
be informed and so most of the movement occurs before
the action actually happens. So what you've seen is bond
nils falling in the US because people think the Fed's
going to cut interest rates next week. The action has
(04:22):
already occurred in daily investing. Right, you get an economic
data point you mentioned the twenty two thousand US jobs
report really weak, people think, ooh, the Fed needs to
lower interest rates to boost the economy, to help the
labor market. That's why we've seen bond yils fall in
recent days. You might get other data coming out like
(04:44):
inflation that you mentioned. If that's higher than expected, you
may actually find bond nils rising. So day to day
investors take a punt based on this economic data on
what future interest rates will be, and that's reflected in
bond yields. It's why investors hate it so much when
(05:06):
what is supposed to happen doesn't happen, right, So the
best example we had of that was the Reserve Bank
meeting before last last meeting. They cut rates the one
before they were supposed to cut rates and didn't. That's
when markets move because they say, hold on, we expected
(05:29):
this to happen. We thought that interest rates were going
to fall. We traded so bond yields would fall. It
didn't happen. Markets do not like that, Michael at all.
Speaker 1 (05:40):
So when we were talking about it before, saying the
expectation is that the Fed will cut rates, but you
said that there's a case for why they may not
cut rates, and as part of that tied to that
inflation data out next week.
Speaker 2 (05:55):
Yeah. I mean, if that inflation data shows that the
tariffs are causing US bike in inflation, well, plenty of
reason to not cut interest rates. One thing about the tariffs,
it's like a one off spike though it's not ongoing,
but it is still a spike. Also, some analysts reckon
(06:17):
that financial conditions in the US are pretty loose, the
economy is pretty resilient. I mean, you look at the
share market when you've got that going on, and the
lending rate at the moment, at the benchmark rate is
not particularly restrictive. Do you really need to cut interest rates?
(06:37):
It's sort of the reason you might do is because
Team Trump says you've got to cut interest rates, and
our Federal Reserve Chair deraon Pale has been fantastic in
standing up for the Fed, while others have fallen, I mean,
not through their own needs, but the pressure from Donald Trump.
I suppose that fear is that if jeraon Pale does
(06:59):
cut interest rates, and the Fed does cut interest rates,
then it's going to be sort of a bit of
a well, we're doing this for Donald Trump, so rock
in a hard place for the Fed. If it does
do it, it's going to be blamed for following Donald Trump.
If it doesn't do it, it's going to be blamed
for curbing the economy. The markets reckon there'll be a
rate cut, but it's no sure thing, definitely sure thing.
Speaker 1 (07:22):
If it does. What does it mean then for Wall Street?
For share markets markets?
Speaker 2 (07:28):
I mean, Wall Street's just booming, and Wall Street should
increase if it cuts rates. If it doesn't cut rates,
that makes it more interesting because Wall Street will fall
that there's been a bunch of leading investment banks over
the past couple of weeks coming out and saying historically,
Wall Street is trading a game. I'm getting a bit
(07:50):
technical here, but I think they're saying about twenty seven
times earnings. Normally it trains at sixteen times earnings. Don't
worry too much about what the times earnings means. Normally
at sixteen's at twenty seven, it's extremely expensive at the moment.
Any bad news as in high inflation, no interest rate
caun't you could well see a correction in Wall Street coming,
(08:13):
and many investment banks thinks that that will actually happen.
It's kind of the price for price to perfection. So
if things aren't perfect, there could be some troubles.
Speaker 1 (08:23):
All right. I think we have comprehensively covered that, and
I love the fact that you gave. You gave so
much detail in all of that. And I contributed one
piece of information in there where I said that the
FED was meeting sixteen seventeen of September, end of next week.
It's Tuesday and Wednesday of next week. So I had
one job one job in that short but I've corrected
(08:47):
the record now, so everything is okay, all this weeking Heaven.
Thanks very much, Sere that we did a great job.
Thanks Michael, indeed was a joint Davitt. If you've got
something that you would like to know, then please send
through your question. We are very happy to dig into it.
Send it through you on LinkedIn, Instagram, Facebook, or at
Fearangreed dot com dot au. I'm Mark Thompson and this
is Fear and Greed Q and a H.
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