This week, investors anxiously await the Federal Reserve's policy decision, particularly concerning the anticipated interest rate cuts. While a quarter-point reduction is widely expected, the market's bullish bets extend further, pricing in a series of cuts stretching into 2026 to preempt a recession. This has driven Treasury yields to multi-month lows, propelled US stocks to record highs, and weakened the dollar.
However, this optimism faces a significant challenge. Persistent inflation, exceeding the Fed's target, and the ongoing impact of tariffs pose considerable risks. Chair Jerome Powell and his colleagues face intense scrutiny to gauge whether the market's expectations are overly optimistic. The Fed's rate projections, the so-called 'dot plot,' will be closely examined for clues about the central bank's approach to easing monetary policy.
Experts offer divided opinions. Jack McIntyre, a bond portfolio manager at Brandywine Global Investment Management, anticipates a quarter-point cut but emphasizes the crucial factor of whether the Fed prioritizes labor market data over inflation. McIntyre's bond purchases, including 30-year debt, reflect his belief that a softening job market might pressure the Fed to act sooner.
Broadly, financial markets seem to prioritize the employment picture, anticipating a dovish tone from the Fed. Benchmark 10-year Treasury yields are near their lowest levels since April, the S&P 500 is near record highs, and the Nasdaq 100 recently concluded its best run of gains in over a year. Meanwhile, the dollar struggles to recover from a significant first-half loss.
Despite the prevailing optimism, some traders are hedging against potential volatility, as the anticipated quarter-point cut is already largely priced in. Options traders suggest a considerable price swing is anticipated in the S&P 500 following the announcement. The precise degree of easing indicated by the Fed's dot plot will be critical. A confirmation of further cuts could quell market reaction, whereas less clarity might trigger significant movement.
Michael Ball, Macro Strategist at Bloomberg Markets Live, notes the delicate balance between sticky inflation, softening labor data, and stable consumer spending, highlighting the complex factors influencing the market's anticipation of aggressive Fed easing. JPMorgan Chase's trading desk adds a cautionary note, warning of a potential 'sell the news' event following the announcement.
The pressure on the Fed is further amplified by President Trump's past criticisms of Powell's approach and the potential appointment of Stephen Miran as a Fed governor. The composition of the Fed's vote, including any dissenting opinions, may significantly influence market reactions, with a unanimous vote or minimal dissent being interpreted as more hawkish. The market's concern lies in the possibility of the Fed overcompensating with overly aggressive easing, highlighting the immense uncertainty and potential consequences surrounding the upcoming decision.
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Originally published at: https://www.bloomberg.com/news/articles/2025-09-14/markets-gear-up-for-series-of-fed-cuts-with-bullish-bets-at-risk
