Expectations of a Fed rate cut are rising, and market reactions depend on multiple factors.
2025-09-17 17:55:40
The Federal Reserve held its meeting on Wednesday (September 17th) and will announce its interest rate decision at 6:00 PM GMT (02:00 AM Beijing Time on Thursday). Powell will deliver a speech 30 minutes later. The market generally expects a 25 basis point rate cut, but the details, particularly the dot plot, will be crucial. Powell is expected to continue the tone of the Jackson Hole meeting, with all eyes focused on possible signals regarding October. A dovish signal could put pressure on the US dollar, while the stock market is concerned about pessimistic economic rhetoric.
The countdown to the Federal Reserve meeting is coming to an end
The long wait is finally over. The most crucial Federal Reserve meeting of 2025 will take place today, with the interest rate decision scheduled for 6:00 PM GMT. Markets overwhelmingly anticipate a 25 basis point rate cut, with focus on the Summary of Economic Projections (SEP) report and its dot plot. Fed Chairman Powell will also hold his customary press conference at 6:30 PM GMT.
Some might argue that with inflation still high and the labor market just beginning to show some signs of slack, a rate cut might not be necessary at this stage. However, following the release of the employment data in early August, Powell's speech at the Jackson Hole Economic Symposium clearly signaled the Fed's intention to restart its easing cycle, and data from early September further reinforced this view.
If the discussion centered solely on the economic outlook and the Fed's dual mandate, today's meeting might have been straightforward. However, with Trump now in office, the situation is much more complex. His power grab, the appointment of Miran, and his attempt to remove Lisa Cook from the Fed are likely to create tensions at today's meeting. While participants are bound by strict confidentiality rules, it may be difficult for Federal Open Market Committee (FOMC) members to express their views freely.
Market reactions may vary greatly
The baseline scenario for today's meeting is: (1) a 25 basis point rate cut; (2) Powell sends a mildly dovish signal at the press conference, leaving room for further easing; (3) the vast majority of members support a 25 basis point rate cut, with at most three dissenters advocating a 50 basis point cut; and (4) a downward revision of economic growth expectations. Since the market has largely digested this scenario, if the meeting results meet expectations, the market reaction may be relatively limited.
Even so, even if the Fed cuts rates by 25 basis points as planned and in line with the aforementioned expectations, other factors could still influence market movements. If the dot plot shows two rate cuts in the remainder of 2025, with a similar strategy continued in 2026, and/or if Powell delivers a dovish tone, this could weaken the dollar and boost risk assets.
Given the near-zero probability of maintaining current interest rates, the biggest risk is that the 25 basis point rate cut is accompanied by a more hawkish press conference than expected. If Powell avoids sending a clear signal about an October rate cut, dampening market expectations for further rate cuts, the stock market could suffer and the dollar could see significant buying.
Meanwhile, a 50 basis point rate cut today seems unlikely. Such a move would likely signal the Federal Open Market Committee's deep concern about the economic outlook and could be seen as a result of political pressure from Trump. In this scenario, gold would likely benefit, while the dollar and US stocks would likely suffer significantly.
Bank of Canada to set tone for Fed meeting
Ahead of the crucial Federal Reserve meeting, the Bank of Canada (BoC) will hold its sixth meeting of 2025. Recent Canadian economic data has taken a sharp downturn, with some slack in the labor market and weak economic growth expected in the second quarter of 2025. Despite mixed inflation signals, the market expects the Bank of Canada to implement its second 25 basis point interest rate cut of the year, with another 25 basis point cut expected in December.
While some might argue that the Bank of Canada was forced to follow the Fed's lead to avoid a sharp appreciation of the Canadian dollar, the reality is that U.S. tariffs and Trump's interest in revisiting the United States-Mexico-Canada Agreement (USMCA) – most likely to modify it to favor the United States – have increased the Bank of Canada's incentive to act today.
The Canadian dollar hasn't seen a major sell-off against the U.S. dollar yet, but that could change today. It wouldn't be entirely illogical if the Bank of Canada were to be more dovish than the Federal Reserve, given the overall economic outlook.
The countdown to the Federal Reserve meeting is coming to an end
The long wait is finally over. The most crucial Federal Reserve meeting of 2025 will take place today, with the interest rate decision scheduled for 6:00 PM GMT. Markets overwhelmingly anticipate a 25 basis point rate cut, with focus on the Summary of Economic Projections (SEP) report and its dot plot. Fed Chairman Powell will also hold his customary press conference at 6:30 PM GMT.
Some might argue that with inflation still high and the labor market just beginning to show some signs of slack, a rate cut might not be necessary at this stage. However, following the release of the employment data in early August, Powell's speech at the Jackson Hole Economic Symposium clearly signaled the Fed's intention to restart its easing cycle, and data from early September further reinforced this view.
If the discussion centered solely on the economic outlook and the Fed's dual mandate, today's meeting might have been straightforward. However, with Trump now in office, the situation is much more complex. His power grab, the appointment of Miran, and his attempt to remove Lisa Cook from the Fed are likely to create tensions at today's meeting. While participants are bound by strict confidentiality rules, it may be difficult for Federal Open Market Committee (FOMC) members to express their views freely.
Market reactions may vary greatly
The baseline scenario for today's meeting is: (1) a 25 basis point rate cut; (2) Powell sends a mildly dovish signal at the press conference, leaving room for further easing; (3) the vast majority of members support a 25 basis point rate cut, with at most three dissenters advocating a 50 basis point cut; and (4) a downward revision of economic growth expectations. Since the market has largely digested this scenario, if the meeting results meet expectations, the market reaction may be relatively limited.
Even so, even if the Fed cuts rates by 25 basis points as planned and in line with the aforementioned expectations, other factors could still influence market movements. If the dot plot shows two rate cuts in the remainder of 2025, with a similar strategy continued in 2026, and/or if Powell delivers a dovish tone, this could weaken the dollar and boost risk assets.
Given the near-zero probability of maintaining current interest rates, the biggest risk is that the 25 basis point rate cut is accompanied by a more hawkish press conference than expected. If Powell avoids sending a clear signal about an October rate cut, dampening market expectations for further rate cuts, the stock market could suffer and the dollar could see significant buying.
Meanwhile, a 50 basis point rate cut today seems unlikely. Such a move would likely signal the Federal Open Market Committee's deep concern about the economic outlook and could be seen as a result of political pressure from Trump. In this scenario, gold would likely benefit, while the dollar and US stocks would likely suffer significantly.
Bank of Canada to set tone for Fed meeting
Ahead of the crucial Federal Reserve meeting, the Bank of Canada (BoC) will hold its sixth meeting of 2025. Recent Canadian economic data has taken a sharp downturn, with some slack in the labor market and weak economic growth expected in the second quarter of 2025. Despite mixed inflation signals, the market expects the Bank of Canada to implement its second 25 basis point interest rate cut of the year, with another 25 basis point cut expected in December.
While some might argue that the Bank of Canada was forced to follow the Fed's lead to avoid a sharp appreciation of the Canadian dollar, the reality is that U.S. tariffs and Trump's interest in revisiting the United States-Mexico-Canada Agreement (USMCA) – most likely to modify it to favor the United States – have increased the Bank of Canada's incentive to act today.
The Canadian dollar hasn't seen a major sell-off against the U.S. dollar yet, but that could change today. It wouldn't be entirely illogical if the Bank of Canada were to be more dovish than the Federal Reserve, given the overall economic outlook.
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