There is little doubt that the Federal Reserve will cut interest rates by 25 basis points, but is there a bigger bomb on the way?
2025-09-17 21:30:47
On Wednesday (September 17), global financial markets awaited with bated breath the Federal Reserve's interest rate decision, to be announced at 2:00 AM the following morning, along with its subsequent economic projections and Powell's press conference. Market expectations were that the Fed would cut interest rates by 25 basis points, adjusting the target range for the federal funds rate to 4.00%-4.25%. This would be the first rate cut since December of last year.
The US dollar index recently hovered around 96.80, near a two-and-a-half-month low, reflecting strong market expectations for loose monetary policy. The British pound sterling fluctuated around the 1.3650 option expiration level against the US dollar, while the euro approached a four-year high against the US dollar. Gold prices retreated from above $3,700 per ounce. US Treasury yields saw limited fluctuations, with the 10-year Treasury yield hovering around 4.01%, reflecting market expectations for rate cuts and focus on future policy guidance.
At the same time, other major central banks around the world, such as the Bank of England and the Bank of Japan, are expected to keep interest rates unchanged, highlighting the uniqueness of the Fed's easing pace.
Recent US economic data has painted a mixed picture. August's non-farm payroll figures were disappointing, with job creation falling far short of expectations and the unemployment rate rising slightly. These signs of labor market weakness reinforce the need for interest rate cuts. Housing market data was equally weak, with single-family home starts plummeting 7.0% to an annual rate of 890,000 units in August and building permits dropping 2.2% to 856,000 units, pushing inventory levels close to their late 2007 peak. Although the 30-year mortgage rate fell to an 11-month low of 6.35%, and home purchases and refinancing activity have rebounded, high inventory levels and a weak job market are limiting the housing market's recovery momentum. Market risk appetite has increased on expectations of rate cuts, but inflation uncertainty fueled by Trump's tariff rhetoric and continued pressure on the Federal Reserve's independence have added uncertainty to the market.
Market expectations for a 25 basis point interest rate cut by the Federal Reserve in September are virtually certain, with data from the London Stock Exchange Group showing a 97% probability of a 25 basis point cut. This decision is primarily driven by the continued slowdown in the labor market, with wage growth remaining below 100,000 for the fourth consecutive month in August and inflation accelerating to 2.9%, approaching the Fed's 2% target ceiling. Reputable analysts point to this rate cut as an "insurance" measure aimed at supporting the job market while avoiding signaling economic distress. However, the magnitude of the rate cut is not the only focus of the market; the dot plot and Powell's press conference will be key to interpreting the future policy path.
The dot plot is expected to reveal the Fed's interest rate expectations for its two remaining meetings this year (October 29-30 and December 17-18). Markets are currently pricing in two additional rate cuts this year, each 25 basis points, for a total of 75 basis points of easing. However, some institutions believe that if the dot plot only indicates one additional rate cut, the market could react by "buying the expectations and selling the facts," potentially leading to a brief rebound in the US dollar index due to the expected discrepancy. Conversely, if the dot plot suggests a more aggressive rate cut path, such as a cumulative 100 basis points of cuts this year, the US dollar could come under further pressure, potentially extending the gains in risky assets like stocks and gold.
Internal divisions within the Federal Reserve are also noteworthy. At the July meeting, Governors Michelle Bowman and Christopher Waller dissented from holding interest rates steady, favoring an earlier rate cut. At this meeting, the voting preference of newly added Governor Stephen Milan is attracting considerable attention. His stance may be influenced by his appointment by Trump. Milan is "almost certain" to dissent. While the dot plot obscures names, it could reveal his preference for a "larger rate cut," directly lowering the median . Market analysts believe that if three or more officials dissent from a 25 basis point rate cut, it could reflect internal disagreement over the pace of easing, further amplifying the importance of the dot plot .
Federal Reserve Chairman Powell's term ends in May 2026. According to Fed practice, the final meeting of a chairman's term typically avoids significant interest rate adjustments to ensure a smooth policy transition. Powell's final FOMC meeting is projected to take place on April 28-29, 2026. Prior to this, the Fed will face four more meetings in October and December 2025, and January and March 2026. The policy path during this period will be constrained by multiple factors.
First, Trump's continued pressure on the Federal Reserve has added external pressure to policymaking . White House trade advisor Peter Navarro recently stated publicly that current interest rates are 100 basis points above "normal" and called for a 50 basis point rate cut in September and another 50 basis point cut at the next meeting. Trump has also previously attempted to influence Fed decision-making through personnel changes, such as attempting to remove Governor Lisa Cook and promoting close associates like Stephen Milan to the Board of Governors. These actions have raised market concerns about the Fed's independence. Some bond fund managers have pointed out that Trump's tariff rhetoric could inflate inflation expectations, thereby limiting the Fed's room for rate cuts.
Secondly, the balance between the labor market and inflation remains a key consideration . Inflation rose to 2.9% in August, and the slowdown in core goods inflation provides room for interest rate cuts. However, inflation in the services sector and food prices remain. If Trump's tariff rhetoric escalates, it could push up import costs, forcing the Federal Reserve to be more cautious in easing policy. UBS economists predict that the Fed is likely to continue cutting interest rates until March 2026, bringing the rate to a neutral level (around 3.0%-3.5%), but if inflation rebounds, the pace of rate cuts may slow.
Looking ahead to October 2025 to April 2026, the Federal Reserve is likely to implement two 25 basis point rate cuts this year, bringing rates to 3.50%-3.75%, followed by an observation period in early 2026. Powell is likely to favor a prudent policy approach in the final days of his term, avoiding significant easing to preserve his legacy while addressing potential calls for more aggressive easing from Trump. If the dot plot indicates fewer than the three rate cuts expected in 2025, the US dollar could stabilize in the short term, while risky assets could face downward pressure.
The Federal Reserve's September rate cut and its dot plot guidance will have a profound impact on global asset prices. The US dollar index has recently hovered near a low of 96.80. If the rate cut is in line with expectations and the dot plot is cautious, the US dollar may find support in the 94.98-96.37 range, rebounding in the short term before continuing under pressure. GBP/USD is fluctuating around the 1.3650 option level. If the Fed sends a dovish signal, it could break through 1.37 and test 1.40. EUR/USD faces a large number of option positions in the 1.19-1.20 range, potentially increasing volatility and raising the probability of a breakout above 1.20.
In terms of commodities, crude oil prices fluctuated amid the Russia-Ukraine situation and global oversupply, with Brent crude and WTI crude trading around $68 and $64, respectively. If the Federal Reserve's interest rate cut boosts demand expectations, oil prices could rebound modestly. Gold, a safe-haven asset, hit a record high of $3,702 per ounce yesterday. Further weakness in the US dollar could push gold prices to test $3,800.
In the stock market, the start of a rate-cutting cycle could further boost the performance of cyclical sectors such as banks, homebuilders, and small and medium-sized enterprises. However, if the dot plot indicates a tighter path for rate cuts, profit-taking could occur, with valuation pressures for technology stocks particularly pronounced. The US Treasury yield curve is projected to steepen modestly by early 2026. Short-term yields could fall back to the high 2% range on expectations of rate cuts, while long-term yields, supported by fiscal deficits and inflation expectations, could remain in the 3%-4% range.
Looking ahead to the coming months, global markets will be engaged in a fierce battle over the pace of the Federal Reserve's rate cuts and the policy negotiations in the final days of Powell's term. The upward momentum of the British pound and the euro against the US dollar will be driven by the diverging policies of the Federal Reserve, the Bank of England, and the European Central Bank. In the commodity market, gold and crude oil are likely to gain support from a weaker US dollar and improved demand expectations. The stock market may continue to rise in the initial stages of rate cuts, but the risk of a pullback due to the "buy the expectations, sell the facts" strategy should be monitored. Structural opportunities in cyclical sectors are worth focusing on.
The Federal Reserve's September decision not only marks the beginning of this year's easing cycle but also sets the tone for the policy path through 2025-2026 . Amidst pressure from Trump and the end of Powell's term, market volatility is likely to intensify. Traders should closely monitor the dot plot and every signal from Powell's speech to capture subtle shifts in market direction.
The US dollar index recently hovered around 96.80, near a two-and-a-half-month low, reflecting strong market expectations for loose monetary policy. The British pound sterling fluctuated around the 1.3650 option expiration level against the US dollar, while the euro approached a four-year high against the US dollar. Gold prices retreated from above $3,700 per ounce. US Treasury yields saw limited fluctuations, with the 10-year Treasury yield hovering around 4.01%, reflecting market expectations for rate cuts and focus on future policy guidance.
At the same time, other major central banks around the world, such as the Bank of England and the Bank of Japan, are expected to keep interest rates unchanged, highlighting the uniqueness of the Fed's easing pace.
Recent US economic data has painted a mixed picture. August's non-farm payroll figures were disappointing, with job creation falling far short of expectations and the unemployment rate rising slightly. These signs of labor market weakness reinforce the need for interest rate cuts. Housing market data was equally weak, with single-family home starts plummeting 7.0% to an annual rate of 890,000 units in August and building permits dropping 2.2% to 856,000 units, pushing inventory levels close to their late 2007 peak. Although the 30-year mortgage rate fell to an 11-month low of 6.35%, and home purchases and refinancing activity have rebounded, high inventory levels and a weak job market are limiting the housing market's recovery momentum. Market risk appetite has increased on expectations of rate cuts, but inflation uncertainty fueled by Trump's tariff rhetoric and continued pressure on the Federal Reserve's independence have added uncertainty to the market.
The core of the Federal Reserve's September decision: 25 basis point rate cut and dot plot signals
Market expectations for a 25 basis point interest rate cut by the Federal Reserve in September are virtually certain, with data from the London Stock Exchange Group showing a 97% probability of a 25 basis point cut. This decision is primarily driven by the continued slowdown in the labor market, with wage growth remaining below 100,000 for the fourth consecutive month in August and inflation accelerating to 2.9%, approaching the Fed's 2% target ceiling. Reputable analysts point to this rate cut as an "insurance" measure aimed at supporting the job market while avoiding signaling economic distress. However, the magnitude of the rate cut is not the only focus of the market; the dot plot and Powell's press conference will be key to interpreting the future policy path.
The dot plot is expected to reveal the Fed's interest rate expectations for its two remaining meetings this year (October 29-30 and December 17-18). Markets are currently pricing in two additional rate cuts this year, each 25 basis points, for a total of 75 basis points of easing. However, some institutions believe that if the dot plot only indicates one additional rate cut, the market could react by "buying the expectations and selling the facts," potentially leading to a brief rebound in the US dollar index due to the expected discrepancy. Conversely, if the dot plot suggests a more aggressive rate cut path, such as a cumulative 100 basis points of cuts this year, the US dollar could come under further pressure, potentially extending the gains in risky assets like stocks and gold.
Internal divisions within the Federal Reserve are also noteworthy. At the July meeting, Governors Michelle Bowman and Christopher Waller dissented from holding interest rates steady, favoring an earlier rate cut. At this meeting, the voting preference of newly added Governor Stephen Milan is attracting considerable attention. His stance may be influenced by his appointment by Trump. Milan is "almost certain" to dissent. While the dot plot obscures names, it could reveal his preference for a "larger rate cut," directly lowering the median . Market analysts believe that if three or more officials dissent from a 25 basis point rate cut, it could reflect internal disagreement over the pace of easing, further amplifying the importance of the dot plot .
Trump's pressure and the policy game at the end of Powell's term
Federal Reserve Chairman Powell's term ends in May 2026. According to Fed practice, the final meeting of a chairman's term typically avoids significant interest rate adjustments to ensure a smooth policy transition. Powell's final FOMC meeting is projected to take place on April 28-29, 2026. Prior to this, the Fed will face four more meetings in October and December 2025, and January and March 2026. The policy path during this period will be constrained by multiple factors.
First, Trump's continued pressure on the Federal Reserve has added external pressure to policymaking . White House trade advisor Peter Navarro recently stated publicly that current interest rates are 100 basis points above "normal" and called for a 50 basis point rate cut in September and another 50 basis point cut at the next meeting. Trump has also previously attempted to influence Fed decision-making through personnel changes, such as attempting to remove Governor Lisa Cook and promoting close associates like Stephen Milan to the Board of Governors. These actions have raised market concerns about the Fed's independence. Some bond fund managers have pointed out that Trump's tariff rhetoric could inflate inflation expectations, thereby limiting the Fed's room for rate cuts.
Secondly, the balance between the labor market and inflation remains a key consideration . Inflation rose to 2.9% in August, and the slowdown in core goods inflation provides room for interest rate cuts. However, inflation in the services sector and food prices remain. If Trump's tariff rhetoric escalates, it could push up import costs, forcing the Federal Reserve to be more cautious in easing policy. UBS economists predict that the Fed is likely to continue cutting interest rates until March 2026, bringing the rate to a neutral level (around 3.0%-3.5%), but if inflation rebounds, the pace of rate cuts may slow.
Looking ahead to October 2025 to April 2026, the Federal Reserve is likely to implement two 25 basis point rate cuts this year, bringing rates to 3.50%-3.75%, followed by an observation period in early 2026. Powell is likely to favor a prudent policy approach in the final days of his term, avoiding significant easing to preserve his legacy while addressing potential calls for more aggressive easing from Trump. If the dot plot indicates fewer than the three rate cuts expected in 2025, the US dollar could stabilize in the short term, while risky assets could face downward pressure.
Market Impact and Asset Price Outlook
The Federal Reserve's September rate cut and its dot plot guidance will have a profound impact on global asset prices. The US dollar index has recently hovered near a low of 96.80. If the rate cut is in line with expectations and the dot plot is cautious, the US dollar may find support in the 94.98-96.37 range, rebounding in the short term before continuing under pressure. GBP/USD is fluctuating around the 1.3650 option level. If the Fed sends a dovish signal, it could break through 1.37 and test 1.40. EUR/USD faces a large number of option positions in the 1.19-1.20 range, potentially increasing volatility and raising the probability of a breakout above 1.20.
In terms of commodities, crude oil prices fluctuated amid the Russia-Ukraine situation and global oversupply, with Brent crude and WTI crude trading around $68 and $64, respectively. If the Federal Reserve's interest rate cut boosts demand expectations, oil prices could rebound modestly. Gold, a safe-haven asset, hit a record high of $3,702 per ounce yesterday. Further weakness in the US dollar could push gold prices to test $3,800.
In the stock market, the start of a rate-cutting cycle could further boost the performance of cyclical sectors such as banks, homebuilders, and small and medium-sized enterprises. However, if the dot plot indicates a tighter path for rate cuts, profit-taking could occur, with valuation pressures for technology stocks particularly pronounced. The US Treasury yield curve is projected to steepen modestly by early 2026. Short-term yields could fall back to the high 2% range on expectations of rate cuts, while long-term yields, supported by fiscal deficits and inflation expectations, could remain in the 3%-4% range.
Future Trend Outlook
Looking ahead to the coming months, global markets will be engaged in a fierce battle over the pace of the Federal Reserve's rate cuts and the policy negotiations in the final days of Powell's term. The upward momentum of the British pound and the euro against the US dollar will be driven by the diverging policies of the Federal Reserve, the Bank of England, and the European Central Bank. In the commodity market, gold and crude oil are likely to gain support from a weaker US dollar and improved demand expectations. The stock market may continue to rise in the initial stages of rate cuts, but the risk of a pullback due to the "buy the expectations, sell the facts" strategy should be monitored. Structural opportunities in cyclical sectors are worth focusing on.
The Federal Reserve's September decision not only marks the beginning of this year's easing cycle but also sets the tone for the policy path through 2025-2026 . Amidst pressure from Trump and the end of Powell's term, market volatility is likely to intensify. Traders should closely monitor the dot plot and every signal from Powell's speech to capture subtle shifts in market direction.
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