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2025-09-15 17:24:58
The Federal Reserve may make an aggressive rate cut, potentially exposing a significant market shock. ⑴ Following last week's meeting, the market generally expected the Federal Reserve to cut interest rates by 25 basis points. However, Societe Generale has proposed a more aggressive 50 basis point rate cut, significantly exceeding market expectations. Previously, market bets on a rate cut of this magnitude were less than 10%. ⑵ Societe Generale's view is primarily based on the recent sharp decline in US labor market momentum. Non-farm payroll growth has slowed significantly over the past four months, and preliminary benchmark revisions point to a record decline, painting an even weaker employment picture. ⑶ Given the central bank's shifting policy focus toward its employment target, even with lingering inflation concerns, Societe Generale believes the Fed's current dovishly restrictive stance may be excessive and requires a forceful adjustment. ⑷ A larger rate cut would acknowledge weak demand and help alleviate further downward pressure on the labor market. August retail sales data is likely to show only a small increase due to rising prices, further supporting the view that real economic activity is cooling. ⑸ The current interest rate market only underestimates the probability of a 50 basis point rate cut. If the Fed takes a bigger move, it will undoubtedly constitute a clear dovish surprise, which may hit the US dollar hard in the foreign exchange market and reignite demand for implied volatility in foreign exchange options from a long-term low.
