The latest data from the US labor market point to a structural weakening that will likely compel the Federal Reserve to initiate a cycle of interest rate cuts.
This policy pivot, marking the end of the post-pandemic tightening era, is not merely a domestic decision but a key event with profound consequences for global markets.
The decision will have domino effects on the price of gold, equity valuations and the direction of global capital flows.
Let’s outline the scenarios facing investors.
A crack in the armor of the US economy
For months, the robust US labor market was the economy’s anchor against uncertainty. That foundation has now developed deep cracks. The employment report for August 2025 sounded a serious alarm: the US economy added a mere 22,000 jobs, signaling a near-complete halt in employment generation. Simultaneously, the unemployment rate rose to 4.3%, its highest level in nearly four years, and wage growth, once a concern, is now on a downward trend.
These figures are not just a monthly fluctuation but the result of the lagged effects of the Federal Reserve’s tightening policies and the persistent uncertainty from ongoing trade tensions. Businesses, especially in the manufacturing and logistics sectors, are now clearly pulling back on hiring and new investments. This situation has placed the Fed in a position where it can no longer ignore the weakness in the labor market.
Fed’s dilemma: choosing between bad and worse
The Federal Reserve operates under a dual mandate: controlling inflation and maximizing employment. While inflation remains slightly above the 2% target, the evidence of weakness in the employment sector has become so strong that it has tipped the scales in favor of supporting economic growth.
The decision to cut interest rates in such conditions is a preemptive measure to prevent a full-blown recession. Fed policymakers have learned from past crises, such as 2008, that delaying a response to recessionary signals can have much more severe costs. Therefore, even if inflation is not fully contained, the risk of a recession is now considered the greater threat.
This pivot from “fighting inflation” to “preventing recession” is a paradigm shift that will alter the entire investment landscape.
Gold: the return of the ultimate safe haven
A rate-cutting cycle is almost unequivocally bullish for gold. This relationship is driven by two main channels:
- lower opportunity cost: As interest rates fall, the opportunity cost of holding gold (a non-yielding asset) decreases compared with government bonds, increasing its attractiveness to investors.
- a weaker US dollar: Rate cuts reduce the yields on dollar-denominated assets, leading to a weaker dollar. Since gold is priced in dollars, a weaker dollar means cheaper gold for buyers with other currencies, thereby boosting demand.
Global equities: a short-term sugar rush or a bull trap?
The reaction of stock markets is more complex. In the short term, lower interest rates mean cheaper money for companies and more liquidity in the financial system, which usually leads to higher stock prices.
However, this optimism comes with a significant medium-term risk: the Fed is cutting rates because it is worried about a weak economy. If the economy remains weak despite the rate cuts, corporate earnings will decline, which cannot justify high stock prices.
This scenario, known as a “bull trap,” is a serious risk for equity investors in the coming months.
Capital flows: the great rotation towards emerging markets
A rate cut in the US changes the equation for global capital flows. As the attractiveness of US bond yields declines, international investors will look for higher returns elsewhere, leading their capital away from the US and towards emerging markets.
This “great rotation of capital” will lead to currency appreciation and stock market booms in these countries, while intensifying downward pressure on the US Dollar Index.
Table 1: comparing the impact of a fed rate cut on markets
MarketShort-Term Effect (1-3 months)Medium-Term Effect (6-18 months)Key RisksGoldStrongly BullishBullishA sudden hawkish shift from the Fed; an external crisis leading to a surge in demand for the dollar.US Equities (S&P 500)Bullish (Liquidity Rally)Neutral to BearishA deeper-than-expected recession leading to a sharp drop in corporate earnings.Emerging Market EquitiesBullishStrongly BullishA global recession impacting exports; domestic political risks in EM countries.US Dollar (DXY)BearishStrongly BearishA severe crisis in Europe or Asia leading to a “flight to safety” and buying of the dollar.
Future scenarios
Three main scenarios can be envisioned for the Fed’s actions and their consequences:
- The gradual cut (base case): The Fed gradually reduces rates in several stages. This scenario would likely lead to a “soft landing” for the economy, a managed decline of the dollar, and sustainable growth in gold and emerging markets.
- The emergency cut: In the event of a sudden crisis, the Fed might drastically cut rates. This would signal panic to the markets and could initially lead to a short-term stock market crash, followed by an explosive rally in the price of gold.
- The hawkish pause: If inflation data are unexpectedly strong, the Fed might go against market expectations and keep rates steady. This would be a major shock, leading to a strengthening of the dollar and a sharp correction in gold and stocks.
A new era for investors
The impending pivot by the Federal Reserve marks the end of one era and the beginning of another. The aggressive fight against inflation is over, and the focus is now on preventing a recession. This shift will redefine the global investment landscape.
The message for investors is clear: the tailwinds behind the dollar and US markets are weakening. A review of asset portfolios and an allocation to assets that benefit from a weaker dollar and lower interest rates – such as gold, commodities, and select emerging markets – now appears to be a prudent strategy
In this new era, complacency is the greatest risk.
A senior economic analyst and deputy CEO of an oil & gas company based in Tehran, Amirreza Etasi (Amir.etasi@gmail.com) has worked for more than a decade at the intersection of public finance, energy and development policy, both in executive roles and as a contributor to major media outlets in Iran and abroad.