A shifting Fed?

Over the past week, a growing number of Federal Reserve (Fed) officials have signaled that interest rate cuts could come as early as July—a more “dovish” outlook. This is a notable pivot from the wait and see tone (a “hawkish” outlook) that had dominated recent months. For example, Chicago Fed President Austan Goolsbee indicated that rate cuts are on the table if tariff-related inflation remains subdued. Similarly, Fed Vice Chair Michelle Bowman expressed openness to a July cut, contingent on continued inflation moderation. Fed Governor Christopher Waller also noted that easing tariff-driven inflation risks could justify earlier rate reductions. 

When the Fed signals potential rate cuts, equities are supported in two ways: 

• Discount rate effect: Lower interest rates reduce the discount applied to future corporate earnings, increasing their present value. This is particularly beneficial for high-growth companies with earnings projected further into the future.
• Liquidity: Easing monetary policy boosts market liquidity and diminishes the relative attractiveness of safe-haven assets—like Treasury bonds or gold—encouraging capital flows into equities and other risk assets. 

Despite ongoing geopolitical tensions–namely from the Middle East and the war in Ukraine—investors have continued to invest in risk assets, like equities. This sentiment is evident in the behavior of the Cboe Volatility Index (VIX), which has declined significantly from its early April peak above 50 (driven by tariff concerns) to 17, which is below its long-term average of 19.5. 

Meanwhile, both the Nasdaq and S&P 500 are approaching all-time highs, reflecting investor confidence in the resilience of the U.S. economy. Continued disinflation, coupled with a more accommodative Fed, is likely to benefit U.S. equities in the near term. 

Maverick Lin contributed to this article. All data from Bloomberg.