After a strong rally in the S&P 500 in August, the US stock market entered September, a typically weak month, with a slight correction. Over the past decade, September has been the worst-performing month for the S&P 500, with an average return of just -0.6%. The index has declined in September in six of the past 10 years.

The most direct trigger for this decline was the latest report released by the US Bureau of Labor Statistics on September 5. According to the report, non-farm payrolls increased by only 22,000 in August, far below market expectations of 75,000, indicating a significant slowdown in job growth, possibly even stagnation.

Furthermore, the employment figures for June and July were revised downward by a combined 21,000, further confirming the deteriorating labor market trend. As a result, market expectations of a rate cut by the Federal Reserve at its meeting on September 17 rose sharply, leading to a decline in the US dollar index and a surge in spot gold prices.

The recent slowdown in US job growth can be primarily attributed to two factors: first, the Trump administration’s comprehensive imposition of import tariffs, which has led to a sharp increase in business costs and discouraged hiring; and second, tightened immigration enforcement, which has directly reduced the labor supply.

Despite a 0.3% month-over-month increase in average hourly earnings, signs of a cooling overall job market are clear. Beyond the non-agricultural data, other labor market indicators are also flashing red flags, including a slowdown in private sector hiring, rising initial unemployment claims, increased layoff announcements and, for the first time in four years, a situation in which job seekers outnumbered job openings. This suggests a labor market stalemate characterized by “low hiring and low layoffs”, with liquidity nearing a standstill.

Concerns over job growth in specific sectors showed significant divergence. Healthcare and social assistance continued to be the primary drivers of job growth, adding 31,000 and 16,000 jobs, respectively. However, federal government employment was sure to be the primary drag, declining by 15,000 in August and totaling 97,000 since its peak in January.

Furthermore, wholesale trade employment continued to decline, falling by 12,000. This stagnant state of low liquidity is highly unstable; in the event of an external shock, unemployment is likely to soar rapidly, thus creating greater macroeconomic uncertainty.

Short-term risks and long-term investment outlook

However, despite market volatility and the possibility of short-term pullbacks, investors may still consider prudently increasing their holdings and taking advantage of future market pullbacks to appropriately increase their equity exposure due to:

— Earnings growth momentum remains stable. 98% of S&P 500 companies have reported second-quarter results, with more than half exceeding earnings expectations.

— The interest rate cuts are expected to support the stock market. The latest inflation data shows that while price pressures remain in some sectors (particularly the services sector), declining energy prices and stabilizing commodity inflation are helping to ease overall price pressures. Slowing labor market demand could also lead Federal Reserve officials to adopt a more dovish stance. History has repeatedly shown that Fed rate cuts are consistently associated with positive stock market returns when the economy continues to grow.

— Long-term AI trends remain intact. Large technology companies delivered strong second-quarter earnings, with most exceeding revenue and earnings-per-share expectations.

— The stock market is expected to continue to experience positive returns after September. After a weak September, the S&P 500 has averaged positive returns in October and November over the past 10 years.

Mounting US debt pressures

By contrast, the short-term risk faced by the US debt may appear to be an “upside surprise”. For example, Ray Dalio, founder of Bridgewater Associates, recently expressed some sharp and critical views on the US economic situation and President Donald Trump’s policies. He believes that the US has at most three years to resolve its debt problem. His reasons are twofold:

First, the debt-service cost ratio. He compares the credit system to blood circulation, and as a measure of “blood vessel blockage”, Dalio focuses on the ratio of national revenue to debt-service costs. The United States currently has nearly $5 trillion in fiscal revenue, while the weighted average interest rate on US Treasury bonds is a whopping 3.32%. The Congressional Budget Office (CBO) projects net interest payments to total $13.8 trillion over the next decade, rising from an annual cost of $1.0 trillion in 2026 to $1.8 trillion in 2035. In recent years, both parties have been increasing the debt ceiling, and the One Big Beautiful Bill Act (OBBA) passed in early July added another $5 trillion, which will only exacerbate the debt problem.

The second is the impact of populism. Dalio believes the rise of populism will further weaken democracy, exacerbate debt accumulation and accelerate the onset of a crisis. Trump’s current promotion of state capitalism is a prime example of this type of populism: he seized a 10% stake from Intel and siphoned 15% of all of Nvidia’s export revenue to China. Populism poses the risk of a “heart attack,” according to Dalio, which is why he believes the US debt crisis has only three years left.

The global impact of US interest rate cycles

Meanwhile, I personally think that Dalio’s prediction is too conservative. In reality, the US debt crisis is likely to occur earlier than expected for two reasons: firstly, the US dollar interest rate cut cycle is expected to accelerate the debt crisis, and secondly, populism may trigger a crisis prematurely.

Historically, US dollar interest rate cuts have triggered several major financial crises worldwide. For instance, the 1982 rate cut led to the Latin American debt crisis, a result of the so-called “dollar tidal effect,” in which the Federal Reserve’s alternating cycles of rate hikes and cuts drive global capital flows.

Taking the Latin American debt crisis as an example, the “dollar tidal effect” and “monetary policy dilemma” are vividly demonstrated. During the low-interest-rate period of the 1970s, Latin American countries borrowed heavily in US dollar-denominated foreign debt to develop their economies. In the 1980s, the Fed raised interest rates to 22% to curb inflation, causing a sharp increase in Latin American debt repayment costs and triggering a wave of debt defaults. In 2025, the Fed cut interest rates again by 25 basis points to 4.00%-4.25%. Still, US Treasury yields remain high (around 4.1% for 10-year bonds), with interest payments accounting for 18.4% of federal revenue, exacerbating debt pressures in the Global South.

As a result, the so-called “debt trap” is gradually forming. Latin American debt-to-GDP ratios exceeded 50% during the 1982 crisis. As of October 2025, the US federal debt-to-GDP ratio has reached 125%, with interest payments projected at $952 billion. History shows that while US interest rate cuts may initially ease short-term debt repayment pressures, if accompanied by rising commodity prices (such as oil), they can actually drive up imported inflation and squeeze policy space.

Surely, Latin American countries cut interest rates early in 2023 to counter the Fed’s policy shift, but a rebound in inflation in 2024 made regulation more difficult. For instance, the Brazilian real depreciated by 20% in the first half of 2024. Although the US dollar rebounded by 1.7% in the short term after the Fed’s September rate cut, its depreciation could trigger a new round of imported inflation in the medium to long term.

Therefore, while US interest rate cuts can ease liquidity pressures in the short term, they may also exacerbate debt vulnerabilities in the Global South in the long term through inflation expectations, capital market fluctuations and geopolitical competition.

This pattern remains relevant today: although the Fed’s 2025 rate cut to 4.00%–4.25% temporarily eased global liquidity, persistently high US Treasury yields and mounting federal debt have heightened financial pressures across the Global South, particularly through imported inflation, capital outflows and shrinking policy space.

Another example is the 2007 interest rate cut, which directly led to the outbreak of the 2008 global financial crisis. Many scholars, including myself, argue that the Federal Reserve’s rapid monetary easing played a decisive role. As the subprime mortgage crisis unfolded, the Fed cut its benchmark rate from 5.25% to 2% through seven consecutive reductions, yet this failed to prevent the collapse of major financial institutions such as Lehman Brothers.

By December 2008, the Fed had slashed rates to a near-zero range of 0%–0.25% and launched large-scale quantitative easing (QE). This “zero interest rate + QE” combination temporarily stabilized markets but also amplified debt leverage and speculative bubbles, sowing the seeds of further instability. The low-interest-rate environment fueled the real estate bubble, and when it burst, mortgage-backed securities (MBS) collapsed in value, triggering a global chain reaction. 

Moreover, as the US dollar serves as the world’s primary reserve currency, aggressive rate cuts spurred massive cross-border capital flows that deepened financial fragility in emerging markets. Finally, markets interpreted the Fed’s rate cuts as a signal of impending recession, prompting panic and a rapid flight from risky assets.

Why rate cuts can trigger crises

Why do interest rate cuts so easily trigger an economic crisis? In the financial market, raising interest rates is akin to storing water. Capital is inherently profit-seeking; it always flows to wherever there is money to be made. When interest rates rise, capital would rapidly flow into the US due to the increased returns.

Historically, US total savings have taken, on average, about eight years to increase by $1 trillion. However, it took only three years for the US gross domestic savings to increase from $4.19 trillion in 2021 to $5.29 trillion in 2024, a clear result of the interest rate hike.

In addition, the rapid growth of the US stock market cap, for instance, the S&P 500, from $30.12 trillion in September 2022 (before the rate hike) to $57.05 trillion in September 2025 (an increase of $26.93 trillion), is also stemming from the influx of international capital into the US caused by the interest rate hike. On the contrary, lowering interest rates is like releasing water from a reservoir. With lower interest rates, capital will flow out of the US and into countries with higher interest rates.

At this point, the US dollar appears poised for another cycle of rate cuts. However, the US macroeconomic fundamentals have shifted significantly over the past decade. In 2008, the federal government’s debt-to-GDP ratio was a healthy 64%. Today, as we know, that ratio has exceeded 120%, and the Fed has already maintained interest rates in the 4.25%–4.50% range for nearly a year.

Chair of the Federal Reserve Jerome Powell’s approach is clearly signaling a strong conservative stance; he understands that the US economy cannot withstand significant volatility and that only gradual interest rate reductions can help the US economy achieve a soft landing. According to Powell’s logic, the rate cuts should be slow and gentle and might continue until 2027. However, in reality, this approach is unlikely to be implemented to a larger extent, as some in the White House are staunch opponents of this idea.

Political pressures and the Fed’s independence

The US political and economic system has long been framed as a straightforward system: the Fed is responsible for the dollar, and the US president is responsible to the voters.

Clearly, as a president with distinctly populist ideologies, Trump places great importance on fulfilling his campaign promises. Especially with the crucial 2026 mid-term elections approaching, Trump is undoubtedly eager for the Fed to quickly cut interest rates so that he can leverage his dominant position in Congress to distribute money to his supporters to win votes.

Over the past six months, Trump has consistently pressured the Fed to swiftly cut interest rates. However, the Fed’s reluctance to comply has led to repeated attacks on Powell, even threatening to fire him. Besides, Trump requested an emergency order from the Supreme Court demanding the resignation of Fed Governor Lisa Cook, acting as a warning to Powell. Therefore, whether Powell can withstand the pressure and continue his steady approach to rate cuts remains uncertain in the short term. 

However, even if Powell manages to withstand the pressure, it might be of little use, as his term as chairman is set to end in May 2026, and Trump has made it clear that he has no intention of nominating Powell to continue as Fed Chair.

Trump previously stated that the list of candidates for Federal Reserve Chair has been narrowed down to three: Kevin Hassett, former director of the White House National Economic Council; Kevin Warsh, a former Federal Reserve Governor; and Christopher Waller, a Federal Reserve Governor. Clearly, these candidates are all in Trump’s camp. If sustained, as one of them is ultimately appointed, not only will the Fed’s independence be compromised, but rapid interest rate cuts could also lead to an accelerated economic crisis.

A looming debt crisis

Once an economic crisis breaks out, it will most likely trigger a US debt crisis. This is because, given the current US fiscal situation, the US government can no longer independently resolve the debt crisis.

Certainly, the US successfully weathered the 2008 financial crisis thanks in part to the Fed’s direct intervention to rescue the market. At the time, total US debt stood at $9 trillion, and the Fed expanded its balance sheet from $900 billion to $4.5 trillion to support the economy. This time, however, with the current US debt pile approaching $40 trillion, how much liquidity would the Fed need to release to avert a debt crisis?

More broadly, the US’s release of liquidity must require someone to take over. From this perspective, the US’s ability to recover from the 2008 crisis was also largely due to China’s assistance. 

During the 2008 global financial crisis, the Chinese government massively increased its holdings of US Treasuries, skyrocketing from $477.6 billion at the end of 2007 to $727 billion at the end of 2008, a nearly $250 billion increase in just one year. By the end of 2009, China had continued to rise to $894.8 billion, another $170 billion incredible increase in just one year. By 2014, when the US finally emerged from the crisis, China’s outstanding holdings of US Treasuries had reached $1.2504 trillion, 2.6 times the 2007 level.

This time, however, if another crisis hits the United States, will China still come to its “aid”? Most likely not. Due to the tensions caused by the bilateral trade and tariff war, it would have been a good thing if China had not taken the opportunity to retaliate against the US at that time. However, except for China, very few countries around the world can currently take on such a large amount of US debt in such a short period of time.

In summary, if Trump makes a radical decision to cut interest rates in the third and fourth quarters, the likelihood of an economic crisis will increase dramatically, ultimately resulting in a collapse of US debt. Perhaps one will not have to wait three years. Instead, we could see a clearer outcome before 2027.

[Kaitlyn Diana edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.