CONTRIBUTORS
Chris Galipeau
Senior Market Strategist
Franklin Templeton Institute
Lukasz Kalwak, CFA
Market Strategist
Franklin Templeton Institute
Executive summary
In this paper, we:
- Revisit our 2024 research paper on asset performance in interest-rate-cutting cycles to compare our outlook to how equity and fixed income markets actually performed
- Give an update on the current global rate-cutting cycle, as many central banks continued cutting rates when the Federal Reserve (Fed) paused rate cuts in the first eight months of 2025
- Review the performance of global equities in previous historical periods when the Fed paused in the middle of a rate-cutting cycle and later resumed cutting
- Review the performance of fixed income assets in the same periods of a Fed pause
- Offer conclusions
Revisiting our 2024 analysis
Almost one year ago, we published "How global equities performed in prior Federal Reserve easing cycles.”
At the time, our analysis showed that during expansionary easing phases—periods when the Fed cut interest rates while gross domestic product (GDP) growth was positive—equities have historically delivered strong returns. The past year has confirmed that pattern once again: Since the first rate cut of this cycle in September of 2024, the MSCI USA Index has risen by roughly 16% through the end of August of 2025, broadly in line with historical performance during prior expansionary easing episodes (see Exhibit 1 below). Similarly, Exhibits 2-4 shown in the paper demonstrate that the predicted trajectories for emerging markets, Japan and Europe were also largely consistent with how those markets have reacted over the past year.
Exhibit 1: MSCI USA Index Performance in 2025 Matched the Historical Average for First Rate Cuts during Expansions
Growth of US$100 Invested at the First Rate Cut
Sources: S&P Global, Russell Investment Group, Nasdaq, Macrobond. Analysis by Franklin Templeton Institute. Data as of August 20, 2025, based on dates September 20, 1984, November 4, 1987, June 6, 1989, July 6, 1995, September 29, 1998. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Important data provider notices and terms available at www.franklintempletondatasources.com.
With this backdrop, the logical next question to ask is, “What comes next?” After cutting interest rates in September, November and December 2024, then pausing for nine months, the Fed has reached a policy inflection point by cutting rates on September 17, 2025. Investors are increasingly focused on the timing and consequences of additional policy easing. Fed funds futures currently imply at least one additional cut of 25 basis points (bps) by year-end, with Fed meetings set for October and December.1
In this paper, we examine how financial markets and the broader macroeconomic backdrop evolve when the Fed resumes cutting rates after a pause. Following an update on policy easing by multiple global central banks over the past year, we turn to past examples of rate cuts after a pause, structuring our analysis in two parts:
- Equity performance following an interest-rate cut after a pause
- Fixed income performance following a rate cut after a pause
Conclusions
- Equities appear likely to grind higher amid rising volatility. Not all cuts are the same. Early cuts in a cycle tend to be bullish and come with relatively low volatility. Interest-rate cuts after a pause, by contrast, are typically associated with higher short-term volatility, but they have nonetheless averaged strong one-year returns across equity styles. On average, the MSCI Emerging Markets Index advanced about 27% and the MSCI USA Index about 17% in the year following such cuts, while markets in Japan and Europe also delivered double-digit gains of 13% and 11%, respectively.
- For both EMs and the United States, rate cuts proved bullish even in recessionary backdrops. The MSCI Emerging Markets Index surged an impressive +30% on average one year after such cuts, despite the fact the United States was in recession. US equities also advanced, posting 13% gains, on average.
- Fixed income also benefits. Fixed income has also historically participated in these rallies, with US Treasuries returning roughly 6%, and US corporate bonds about 8%. Similarly, we found that global bonds returned around 8% on average in the year following a pause-cut sequence.
Endnotes
- Source: Bloomberg. August 29, 2025.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Performance of the fund may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors.
Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
WF: 6826408