Finance
The Federal Reserve continues pause on interest rate cuts, expects two cuts later this year
Rates remained unchanged after the Fed meeting. (iStock)
The Federal Reserve just met to discuss the possibility of interest rate cuts. This time around, the Fed decided to extend the rate pause, leaving rates in the 4.25% to 4.5% range. The decision came due to stable economic activity that’s expected to grow in the first quarter. Economists largely expected this outcome.
“The Fed is going to keep rates where they are today,” predicted Melissa Cohn, regional vice president of William Raveis Mortgage. “[Federal Reserve Chair Jerome Powell] has repeatedly said that the Fed is in no hurry to cut rates. The Trump administration’s tariffs could reignite inflation, making future rate cuts unlikely, too.”
Although the Fed noted that inflation remains elevated, the unemployment rate has stabilized, and labor markets are still solid. To inch the economy closer to 2% inflation levels, the Fed ultimately decided to leave rates where they were.
“While the economic activity in the first quarter economy is still on track to report growth, American households are increasingly concerned with potential re-inflation, their job security and financial outlook, which is holding them back from making major expenditures,” Dr. Selma Hepp, CoreLogic chief economist, said in a statement. “At the same time, many are still catching up with inflation in housing and related services of the last few years.”
Despite a slowly growing economy, consumers aren’t entirely confident in the economic situation. A variety of social and political actions are still impacting American households. Newly implemented tariffs are one of the factors contributing to this uncertainty.
“The Federal Reserve’s war in fighting stubborn inflation continues to impact the day-to-day lives of American households,” explained Anya Gezunterman, director at Imperial Fund Asset Management, in a statement. “On top of this, the Fed now has to look closely at any tariff-related price increases, which would also keep interest rates higher for longer.”
“That said, as the economy seems to continue its so-called ‘soft landing,’ we expect mortgage rates to drift lower through the summer gradually, but not by more than a percentage point,” said Gezunterman.
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INFLATION EASES IN FEBRUARY, BUT TRUMP TARIFFS COULD DERAIL PROGRESS
Two more rate cuts are predicted by the end of the year
Rates remained unchanged after the Fed meeting, but they signaled that two rate cuts would happen this year. Economists largely agree that consumers will see cuts shortly. Analysts from Barclays expect two quarter-point rate cuts, likely in June and September. They previously believed there would be just one cut in June.
“The softer labor market causes us to add another rate cut, despite higher inflation,” Barclays analysts said.
Barclay predicts a slowing labor market will raise the unemployment rate later in the year, with unemployment peaking at 4.3% in October.
The first rate cut in June is expected to “reflect [this] slower growth and rising unemployment.” The second rate cut in September is expected to indicate “a rising unemployment rate and some signs of improvement in monthly inflation prints.”
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MORTGAGE RATES HIT A TWO-MONTH LOW THIS WEEK, REMAIN UNDER 7%
Consumer confidence has dropped substantially in the last month
Many consumers don’t see the economy as stable, as made apparent by the Consumer Confidence Survey. Consumer Confidence measures the way Americans feel about business and economic conditions.
The Present Situation Index fell by 3.4 points to 136.5 in February, while the Expectations Index also dropped 9.3 points to 72.9. Below 80 on the Index typically signals a recession on the horizon. It’s the first time the Index has been this low since June 2024.
“In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, senior economist, Global Indicators at The Conference Board. “This is the third consecutive month-on-month decline, bringing the Index to the bottom of the range that has prevailed since 2022…Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month-high.”
More people did plan to purchase homes, showing one area of improvement. The very recent decline in mortgage rates is likely why homebuyers are more willing to buy. Car buying plans declined, however, as did plans to make bigger purchases, like TVs and other electronics.
“Average 12-month inflation expectations surged from 5.2% to 6% in February. This increase likely reflected a mix of factors, including sticky inflation, but also the recent jump in prices of key household staples like eggs and the expected impact of tariffs,” Guichard said. “There was a sharp increase in the mentions of trade and tariffs, back to a level unseen since 2019.”
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Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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