The Fed's interest rate cut is a foregone conclusion, but three major uncertainties remain to be resolved.

Written by: Bitpush

The Federal Reserve (Fed) meeting of the Federal Open Market Committee (FOMC) held this Tuesday and Wednesday has been described by well-known financial commentator Nick Timiraos as one of the most "peculiar" meetings in the institution's history.

The market almost universally expects that after the two-day policy meeting, the Fed will announce its first rate cut in nine months on Wednesday. According to CME's FedWatch tool, the probability of a 25 basis point cut to the 4.25%-4.50% range is as high as 96%, making it almost a certainty.

The Fed has finally decided to start the interest rate cut cycle, primarily due to the persistent weakness in the U.S. labor market and officials' increasing confidence that the inflation caused by tariffs may only be a temporary phenomenon.

According to data from the Department of Labor, in the three months ending in August, the average monthly addition of new jobs was only about 29,000, the weakest three-month increase since 2010 (excluding the pandemic period). In addition, the number of unemployed has now exceeded the number of job vacancies; the number of first-time applicants for unemployment benefits has reached a nearly four-year high; and the number of long-term unemployed (those unemployed for more than 26 weeks) has reached its highest point since November 2021. Preliminary revisions of last week's employment data further show that the fundamentals of the U.S. labor market have been weaker than previously thought since entering the summer.

In addition, Federal Reserve Chairman Jerome Powell laid the groundwork for this rate cut in his speech at the end of August, when he clearly stated, "The risks to employment are rising." This reflects that concerns within the Federal Reserve about achieving its "maximum employment" mandate have surpassed worries about inflation.

However, although the interest rate cut has become a foregone conclusion, the uncertainty surrounding this meeting and future monetary policy has reached unprecedented heights. These pending factors are the real key influences on the financial markets and asset pricing.

Mystery One: The "Dot Plot" of Future Interest Rate Path – How many more rate cuts will there be this year?

As the 25 basis point rate cut has been highly priced in by the market, traders will no longer focus on "whether there will be a rate cut," but rather on the Fed's policy forecast for the remainder of 2025.

Future guidance expected by the market

In the announcement on Wednesday, Fed officials will release the latest economic forecasts, with the most关注 being the "Dot Plot" - which reflects the expectations of FOMC members regarding future interest rate levels.

Expectations of Continued Rate Cuts: Traders are boldly betting that the Fed will not cut rates "all at once," but will instead begin a cycle. According to CME's FedWatch tool, the market believes there is over a 70% chance of continued rate cuts in October and December.

Potential Divergence Signals: Goldman Sachs economists expect the "dot plot" to show two rather than three rate cuts, but "the divergence will be minimal." If the Fed ultimately suggests that the pace of rate cuts is slower than the market expects, it could trigger a repricing and sell-off of risk assets. Conversely, if it indicates three or more rate cuts, it would be a significant dovish boost.

The view of Goldman Sachs economists is that the key point of this meeting is whether the committee will hint that "this will be the first in a series of consecutive rate cuts." They expect that the statement will not explicitly mention a rate cut in October, but Powell may "gently" hint in that direction during the press conference.

The split vote between hawks and doves

The voting composition of this meeting is also filled with uncertainty. Although a majority of committee members expect to support a 25 basis point rate cut, there is a clear division within the committee:

Calls for a "significant" rate cut: Newly appointed board member Stephen Miran is likely to cast a dissenting vote, advocating for a larger rate cut. Treasury Secretary Scott Bessent has also publicly encouraged the Fed to take a "comprehensive" rate cut.

Voices Against Interest Rate Cuts: Kansas City Fed President Jeffrey Schmid and St. Louis Fed President Alberto Musalem may oppose interest rate cuts due to concerns about inflation risks from tariffs.

This split will highlight the increasing policy divergences within the committee, making the future actions of the central bank even more unpredictable.

Suspense 2: Powell's "Tuning" - How to Balance Inflation and Employment?

After the announcement of the interest rate decision, Powell's choice of words at the press conference is usually more important than the FOMC statement itself, as he will be responsible for explaining the committee's thinking.

Is inflation "temporary" or "persistent"?

Fed officials generally believe that the increase in inflation caused by the tariff policy of the Trump administration may be only temporary.

San Francisco Fed President Daly stated, "The price increases related to tariffs will be one-off." Other officials also expect that the effects of tariffs will be transmitted in the next two to three quarters, and the impact on inflation will subsequently fade. They believe that in the context of a weak labor market and an unstable economy, the flexibility for businesses to raise prices is reduced, so there is little sustained inflationary pressure.

Powell's speech must strike a balance between two missions: full employment and price stability. He needs to convey a "pragmatic yet more dovish" tone. As the strategist at B. Riley Wealth Management mentioned, his tone will be "pragmatic, but more dovish," indicating that the Fed needs to defend its mission of full employment more vigorously.

Data dependence and future policy flexibility

Traders will closely watch whether Powell will give any soft hints regarding actions in October. If he emphasizes "data dependence" and suggests that there is still significant room for future policy adjustments, it will leave suspense for the market, allowing asset prices to continue to fluctuate with economic data.

Suspense Three: Unprecedented Political Interference - The Independence of the Federal Reserve is Challenged

The uniqueness of this meeting stems partly from the political turmoil surrounding the core powers of the Fed. The ongoing pressure exerted by the Trump administration on its independence is the "elephant in the room" that looms over the meeting.

The rapid rise and voting of new council members

Stephen Moore, President Trump's chief economic advisor, was confirmed by the Senate on Monday and sworn in on Tuesday morning, gaining voting rights for this FOMC meeting just in time. This process, which usually takes months, was expedited, seen as Trump’s desire to have Moore cast a key vote in support of "significant rate cuts" at the September meeting. Moore himself stated that he would think independently, but his swift confirmation undoubtedly reflects the political pressure influencing the Fed's operations.

Attempt to dismiss Director Cook

Trump publicly expressed a desire for Republicans to hold a majority on the Federal Reserve Board and attempted to fire Fed Governor Lisa Cook at the end of August, setting a historical precedent. Although the appeals court temporarily blocked Trump's dismissal order, Cook was still able to vote at this meeting, but her position remains unresolved, and litigation is ongoing.

These changes highlight the significant challenges facing the political independence of the Federal Reserve. This means that any policy decision it makes will carry political overtones, and for investors relying on macro stability, this "noise" itself is a risk.

Summary: The market is waiting for signals, not decisions.

A 25 basis point rate cut is already a market consensus. However, the real significance of this meeting lies in how it will set the tone for monetary policy in the last four months of 2025.

As BNY strategists have stated, the Fed's "dual mandate goals are in a state of 'tension'", and the increasing politicization complicates the situation further. The market will closely monitor every word from Powell, looking for signals to determine portfolio allocation.