Expect 'maybe two more rate cuts early next year,' Schwab strategist tells advisors

As the Federal Reserve faces pressure from both politics and the markets, Schwab leadership believes investors should prepare for a slower, more uneven path toward normalization. In an opening roundtable at Schwab Impact 2025, moderated by Kevin Gordon, director of macro, investment research, and strategy, panelists honed in on how a still-stubborn inflation rate and widening economic divides are shaping monetary policy and market performance.

High bar for December rate cut
 

Kathy Jones, Schwab’s chief fixed income strategist, said investors shouldn’t expect a December rate cut. “A rate cut in December would be very hard to pull off with this Fed,” she said. “[Fed Chair Jerome] Powell’s words were, 'it’s far from certain' — a high bar.”

Jones argued that the central bank has entered a holding pattern. “They’ve lowered rates, they’re getting toward neutral, and now it’s time to pause because they don’t have enough information,” she said. “The two mandates are very much in tension — unemployment is around 5%, inflation’s stuck at 3%, and that doesn’t add up to a bunch of rate cuts.”

She added that markets have gotten ahead of themselves. “We’ll probably see maybe two more rate cuts early next year,” Jones said, “but not much more than that.”

Michael Townsend, Schwab’s managing director for legislative and regulatory affairs, said the Fed’s challenges are not just economic but institutional. “Fed independence is at an unprecedented point,” he said, citing the Supreme Court case involving Fed Governor Lisa Cook. “The President has tried to fire one of the seven governors over allegations from before her nomination. Lower courts have ruled she can stay, and now we’re headed to the Supreme Court.”

Townsend added the case could affect confidence in the Fed’s decision-making. “The Fed would clearly like to get back to talking mostly about monetary policy and not dealing with all these personnel and political issues,” he said.

Under the hood, an uneven economy 
 

Liz Ann Sonders, Schwab’s chief investment strategist, described the current environment as one of widening divergence. “It seems like everybody’s writing about and talking about the K-shaped nature of the economy right now,” she said. A K-shaped economic recovery is one where the upper arm of the 'K' represents groups that benefit, while the lower arm represents groups that are being left behind. “You see it in the consumer — high income versus low income. You see it in inflation — goods versus services. You even see it within goods — tariff-impacted versus non-tariff-impacted.”

Sonders pointed out that the same pattern is visible in markets. “These bifurcations have fed into market behavior,” she said. “It’s a mixed picture — lots of splits, and they’re widening.”

She linked those divides to the lingering effects of tariffs. “People say, ‘It’s just a one-time price jump,’ but the rollout of tariffs has been anything but one time,” she said. “The tariff impact is not fully in the rear-view mirror.”

Bonds behave, but policy uncertainy persists
 

Despite the policy noise, Jones said the fixed income market has shown stability. “The Treasury market hit a multi-year low in volatility recently,” she said. “Given all the turbulence that’s out there, that’s quite remarkable.”

She credited competing forces for holding yields steady. “A little inflation pressure keeps yields from falling, while the Fed’s easing tells us growth is going to slow,” she said. “It’s a gradual shift, but not a big market moment.”

Townsend tied the relative calm to investors’ broader uncertainty about Washington. “Even the guys who had never voted for a debt ceiling increase just approved a $5 trillion rise,” he said. “Apparently nobody cares about the deficit anymore — and that feeds into the long-term questions the Fed is trying to manage.”

The panelists see a Fed constrained on all sides — by politics, data gaps, and a two-speed economy. Jones’s view of a “pause” and Sonders’s portrait of a “K-shaped” recovery converge in a message of patience. As Townsend summed up, the Fed’s independence and credibility “are now part of the market narrative” — a new variable in an already complex equation.