The U.S. Federal Reserve is at least “two cuts” behind the curve and will need to ramp up rate cuts aggressively over the next 12 months - a trend that should be bullish for stocks, according to Fundstrat co-founder Tom Lee.
In a Monday interview with CNBC, Lee described the U.S. stock market’s performance as the “most hated V-shaped recovery,” pointing to the Dow, S&P 500, and Nasdaq’s sharp rebound from their lows.
As Investors Observer reported, the S&P 500 Index and Nasdaq Composite notched fresh all-time highs on Friday - a feat that would have seemed highly improbable just a few months ago.
Although the Fed remains cautious about lowering interest rates due to lingering inflation concerns, price pressures have been “very muted,” Lee said.
“Outside of tariffs, underlying inflation is actually much lower than people expect,” said Lee.
Bond markets think the central bank is at least “two cuts behind [...] which means the Fed can be more dovish in the next 12 months, and that’s a tailwind for stocks,” he said.
Lee isn’t alone in this view. Morgan Stanley strategists recently predicted that policymakers will cut rates seven times next year to prevent the economy from sliding into a recession.
Analysts at Julius Baer International hold a similar outlook, though they’re forecasting four rate cuts beginning in October, which would lower the federal funds rate to 3.5%.
Still, for President Trump, that’s nowhere near low enough.
President Trump ramps up calls for rate cuts
President Trump’s criticism of Fed Chair Jerome Powell has grown sharper, with the White House confirming that Trump has personally called Powell to demand lower interest rates.
Trump has previously argued that rates should be at least 200 basis points lower than they are now. More recently, he has said that rates should be cut to as low as 1%.
In a bizarre twist, Trump reportedly sent Powell a handwritten note calling him “too late” and including a list of global central bank rates for comparison.
“Should be here,” Trump wrote next to the interest rates of Switzerland, Cambodia, Japan, Denmark, and others.
You can't make this up:
undefined The Kobeissi Letter (@KobeissiLetter) June 30, 2025
President Trump just issued a handwritten note to Fed Chair Powell.
The note calls Powell "too late" and shows how US rates "should be here," pointing at other countries' rates.
Trump says "we should be paying 1% interest, or better."
Are 1% rates… pic.twitter.com/rlUX9RCbkx
Trump, like others, is calling for lower rates to help the government cope with ballooning interest expenses.
As Investors Observer recently reported, annual interest payments on the federal debt have soared to a staggering $1.2 trillion, higher than Medicare and defense spending. It’s also just $300 billion shy of the largest budget item, Social Security.
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