I Have A Bad Feeling About This...

The Fed Prepares to Cut Rates Into a Market It May Not Fully Understand

As I write this, I can’t help but feel that the script for tomorrow’s Fed announcement has been written in advance. On September 17th, 2025, Jerome Powell and his colleagues are expected to deliver the first rate cut since December 2024. Futures markets aren’t just leaning that way; they’ve already priced it in. A 25-basis-point trim to 4.00%–4.25% looks all but certain.

On the surface, the rationale seems clear. Job growth has slowed to a crawl, with just 22,000 payrolls added in August. Unemployment has crept up to 4.3%, the highest level in four years. Inflation has cooled into the high-2s. Politically, the calls are loud and relentless. President Trump has urged cuts of at least three percentage points, immediately, portraying the Fed as standing in the way of growth. The Fed won’t oblige, but the pressure is undeniable.

Markets are already celebrating. The S&P 500 sits near all-time highs, powered by a handful of giant technology companies whose valuations now defy even the most generous growth assumptions. Housing prices, supposedly capped by affordability, have managed to climb nearly 3% year-over-year as cash buyers shrug off mortgage rates still north of 6%. Even consumer confidence surveys, oddly enough, suggest a public that doesn’t quite believe the labor weakness narrative.

And yet, under the surface, warning lights are flashing. Gold has surged to more than $3,700 an ounce. The secured overnight financing rate—SOFR, the benchmark for repo funding—has been creeping higher, a sign that liquidity is not as plentiful as headlines would suggest. And stock valuations, by nearly every historical measure, are at extremes rivaling 1929, 2000, and 2008.

The Fed will cut tomorrow. But the deeper question is whether it’s cutting into stability or fragility.

Repo: The Hidden Plumbing of Finance

To understand why this matters, it’s worth spending a moment on the repo market. Repo, short for “repurchase agreement,” is where banks, hedge funds, and institutions borrow cash overnight by pledging Treasuries as collateral. Think of it as pawning a Treasury bond overnight and then buying it back the next morning, usually for a tiny bit more. For the lender, it’s a safe, collateralized way to earn interest. For the borrower, it’s a lifeline of liquidity.

When repo works smoothly, nobody notices. It is the silent plumbing that allows credit to flow, balance sheets to roll over, and markets to function. But when repo clogs, the effects cascade. Suddenly, cash disappears. Banks hesitate to lend. Spreads widen. And in a world where nearly every financial transaction depends on short-term funding, the results can be dramatic.

We’ve seen this before. In September 2019, what should have been a routine tax deadline and Treasury settlement drained bank reserves. Overnight repo rates spiked to 10%—a full three percentage points above the Fed’s target. Within hours, the Fed had to step in with $75 billion in emergency lending. A few days later, calm returned, but the episode revealed just how fragile the system could be.

The same thing happened in March 2020. As COVID panic set in, everyone rushed to hold cash, even if it meant selling Treasuries. Repo spreads ballooned worldwide. The most liquid market in the world—the U.S. Treasury market—seized up. Only unlimited quantitative easing calmed the waters.

Even further back, in July 1958, heavy Treasury issuance triggered what became known as a “bear squeeze,” when margin calls cascaded into panic. The Fed didn’t yet have the same tools, so it relied on jawboning and quiet persuasion to steady markets.

The pattern is always the same. When repo breaks, liquidity disappears. And when liquidity disappears, panic follows.

That’s why September’s drift higher in SOFR matters. On September 16, SOFR printed at 4.51%, up from 4.42% the prior day. That may sound small, but direction matters. The Fed is preparing to ease, and yet the most important short-term rate in the system is tightening. The contradiction couldn’t be clearer: easing at the surface, stress underneath.

Valuations at the Edge

Overlay this liquidity stress with today’s valuations, and the risk becomes sharper. By almost every measure, equities are priced for perfection.

The Shiller CAPE ratio, which smooths earnings over ten years, sits at 39—higher than at any point in history except the peak of the dot-com bubble. The trailing P/E for the S&P 500 is nearly 30, double its long-run average. And the Buffett Indicator, comparing total market capitalization to GDP, has surged to 217%, higher than even the 2000 peak of around 190%.

What these metrics tell us is that investors aren’t just optimistic. They’re assuming eternal growth and permanent liquidity. They’re betting on the continuation of conditions that have almost never held.

Consider the $7 trillion sitting in money market funds. Today, that money earns around 4.5% with minimal risk. If the Fed cuts rates, some of that cash will likely move in search of higher returns. Where does it go? Equities. And not just any equities, but the same handful of mega-cap technology stocks that have already been bid to the sky. That was the dynamic of 1998 to 2000, when aggressive Fed easing after the LTCM crisis fueled the final leg of the dot-com bubble. The rally was spectacular. Its collapse was brutal.

The danger isn’t simply that stock prices rise further. It’s that they rise further while the real economy weakens. That widening gap between market euphoria and economic reality is the hallmark of every major bubble.

Echoes of History

History doesn’t repeat, but it does rhyme.

In 1929, the Fed eased modestly as markets overheated. The Dow ultimately fell 89%. In 2000, the Fed’s earlier cuts sparked a surge in speculative tech stocks that ended with the NASDAQ losing 78% of its value. In 2008, aggressive rate cuts and emergency programs stabilized the system but left behind distorted yields, zombie firms, and a decade of suppressed returns for savers.

Even 2019 offers a smaller but telling rhyme. The repo spike wasn’t about fundamentals. It was about mechanics. And yet it was enough to send overnight rates into double digits and force the Fed into action.

The common thread across these episodes is simple. Rate cuts in the face of bubbles or liquidity stress don’t deliver lasting calm. They buy time, but at a steep cost. They prolong imbalances and raise the severity of the eventual correction.

Gold’s Silent Alarm

If equities are euphoric and repo markets are strained, gold sits in quiet protest.

Gold has rallied 41% year-to-date, reaching all-time highs even after adjusting for inflation. This isn’t just an inflation hedge. It’s a statement of doubt.

In 2019, when the Fed stepped in to backstop repo, gold sagged. Investors believed the intervention would work. In 2025, gold is climbing into the cut. The contrast says everything. Markets don’t believe that a 25-basis-point trim is enough. They don’t believe the Fed has full control of liquidity. They don’t believe easing can coexist with stability.

Gold whispers. But lately, it has been whispering loudly.

The Hidden Risks Beneath the Surface

The risks don’t stop at repo and valuations.

The U.S. government faces a $9–14 trillion refinancing cliff by 2026. Rolling that debt over at higher rates could overwhelm budgets, erode bond values, and strain banks and pensions that hold Treasuries as “risk-free” assets. Consumers are already stretched. Delinquencies are rising in auto loans, credit cards, and student debt. Spreads remain far too tight to absorb shocks, leaving lenders exposed if defaults rise further.

And then there are derivatives. With $465 trillion in contracts outstanding, even small moves in rates can cascade through the system in unpredictable ways. Derivatives are designed to hedge risk, but in practice they often amplify it.

Finally, there’s the risk of inflation itself. A shallow cut tomorrow might not matter much. But if political pressure forces the Fed into deeper easing—say, the 300 basis points Trump has demanded—CPI could easily rebound above 5%. That would force the Fed back into tightening, turning a soft landing into a hard one.

These are not the risks you’ll see on tomorrow’s headlines. But they are the risks seeded by tomorrow’s decision.

Powell’s Tightrope

Powell faces a brutal dilemma. Cut too little, and liquidity stress worsens. Cut too much, and the bubble expands. Either way, the Fed’s credibility is on the line.

The Fed has tools. Temporary repo operations. Balance sheet tweaks. Expansion of the Standing Repo Facility. Quantitative easing if absolutely necessary. But none of these erase the fundamental contradiction of cutting into a mix of liquidity stress and asset overvaluation.

In the end, the decision may matter less than the message. If Powell signals gradualism—deliberate steps rather than desperation—the market may grant him time. If he bends too far to political pressure, that time could vanish.

The tightrope is narrow. The stakes are high.

Relief Now, Reckoning Later

Tomorrow’s cut is almost guaranteed. But the outcome is not.

Markets want relief. Politicians want momentum. The Fed wants stability. But history, valuations, and repo stress all suggest that cutting here trades short-term calm for long-term risk.

And the truth is, I don’t know exactly how this plays out. No one does. We are dealing with a complex situation that no model fully captures and no policy tool can completely control.

What I do know is this: the setup is fragile, the risks are mounting, and the parallels with past crises are too loud to ignore. In the words of so many Star Wars, “I have a bad feeling about this.”