Markets have a way of latching onto expectations—until reality forces a reset. Right now, the Federal Reserve’s rate cut trajectory is going through one of those mini cycles, where what happens in May could make or break what’s likely by September.

It doesn’t take much to shift sentiment. Bloomberg recently put it in simple terms:

“Actual inflation and price expectations will ultimately prove too high for the Fed to justify rate cuts in the first half of 2025 — regardless of what markets wager.”

That statement alone is a reminder that Wall Street’s bets don’t dictate the Fed’s actions. Sure, traders can price in cuts, but if inflation stays elevated, the central bank won’t play along.

May’s Role in the Bigger Picture

Right now, markets are hinging a lot on what happens by May. If inflation data continues to show signs of stubbornness, the Fed will have little justification to begin easing. And if May passes without a rate cut, the domino effect is clear:

• September, which once seemed like a lock for a cut, suddenly looks more uncertain.
• Instead of three cuts in 2025, markets may have to brace for just two—or even fewer.
• The “higher-for-longer” narrative gains even more traction.

Essentially, May sets the tone for what’s possible in the back half of the year. If conditions don’t support a cut by then, it compresses the Fed’s timeline, making any future moves even more data-dependent.

The Cycle of Expectations vs. Reality

This is nothing new. The past two years have been a constant battle between market expectations and Fed policy. Investors have repeatedly priced in aggressive rate cuts, only for inflation or labor market resilience to push those timelines back.

The takeaway? Markets love to anticipate, but the Fed moves on data. If inflation metrics force a delay, then all the speculative pricing of rate cuts won’t matter.

If May disappears as a viable cut window, we’re back to debating just two moves by September—if that. And once again, the cycle resets, with traders recalibrating their bets while the Fed keeps its focus on the numbers.

For now, all eyes are on May. But if recent history is any guide, the story is far from settled.