The Federal Reserve (FED) is almost certain to lower interest rates in October! Trump is pressuring for a 300 basis point cut, which is bullish for Bitcoin and the real estate market.

The Chicago Mercantile Exchange Group (CME Group) Federal Reserve observation tool shows that during the FOMC meeting on October 29, the probability of the Federal Reserve cutting interest rates by 25 basis points is 97.3%, which would lower the federal funds target to 3.75% to 4.00%. Trump has repeatedly criticized the Federal Reserve since taking office in January, calling for a 300 basis point rate cut to boost the real estate market, and a rate cut is favorable for Bitcoin.

CPI cooling clears obstacles, October interest rate cut is almost certain

(Source: CME Fed Watch)

The U.S. Department of Labor started work a couple of days ago, and the CPI data for September released was overall lower than expected, clearing the way for further rate cuts by The Federal Reserve (FED) in October. The cumulative probability of a 50bp rate cut in December has reached 95.8%, and the market has almost priced in easing. This means liquidity is returning, but risks are also reviving. Rate cuts are the starting signal for capital, which will drive U.S. Treasury yields down, weaken the dollar, and push asset prices up. However, if inflation resurges, the market will immediately question whether this rate cut was too early, leading to secondary volatility.

The closely watched Chicago Mercantile Exchange Group (CME Group) Federal Reserve observation tool indicates that during the Federal Open Market Committee meeting on October 29, the likelihood of a 25 basis point cut to the federal funds rate is 97.3%, which would lower the federal funds target to around 3.75% to 4.00%. Traders welcomed the prospect of a rate cut after the Consumer Price Index (the only leading indicator released in September) came in below expectations.

Michael Feroli, chief U.S. economist at JPMorgan, told the Associated Press: “Soft inflation provides an excuse for the Federal Reserve to ease policy.” Recent comments from Federal Reserve Chairman Powell have solidified investor expectations for at least one more rate cut this year. Historically, the early stages of rate cuts by the Federal Reserve are often accompanied by a recovery in risk appetite—Bitcoin rose 7% in the week following the rate cut in September, and Ethereum rose 18%. ETF funds saw a net inflow of $62 billion over five consecutive days, indicating that institutions have not exited the market, but are waiting for confirmation signals—such as a formal rate cut.

In addition, this path currently seems quite unclear to some people. Fiorilli and other economists indicate that the committee's decision will balance between the inflation rate still being above the Federal Reserve's 2% target and the increasing evidence that the labor market is weakening. This balancing act makes the extent and pace of the Federal Reserve's interest rate cuts fraught with uncertainty.

Government shutdown creates data fog, The Federal Reserve (FED) decision falls into blindness

The government shutdown began on October 1, and there are currently no signs of a resolution. This requires The Federal Reserve (FED) to consider indicators from the public or private sector. Due to the shutdown of the government's main statistical agencies, private sector data has filled in some gaps, but often lacks credibility or timeliness, leaving the FED in a “data fog.” These missing data points are crucial for the FED's dual mandate: maximum employment and stable prices.

If there is no new data, the Federal Reserve may misjudge the economic trend. Economists warn that if the government shutdown continues, the central bank will not be able to obtain key information, which could complicate the timing and extent of future interest rate cuts. Gregory Daco, chief economist at EY-Parthenon, told Reuters: “If the government shutdown continues, the Fed's next decision will essentially be blind.”

The data affected by the government shutdown includes: the non-farm employment report from the Bureau of Labor Statistics, unemployment rate data, wage growth data, as well as GDP growth data and the Personal Consumption Expenditures (PCE) price index from the Bureau of Economic Analysis. These are all core reference indicators for the Federal Reserve in formulating monetary policy. Without this data, the Federal Reserve can only rely on surveys and reports from the private sector, but the quality and timeliness of this data is not as good as official statistics.

Three Major Impacts of Government Shutdown on The Federal Reserve's Interest Rate Decision:

Missing Employment Data: It is difficult to accurately assess the trends in the labor market, making it hard to determine whether it is necessary to boost employment through interest rate cuts.

Incomplete inflation data: The PCE price index is temporarily suspended, and the Federal Reserve loses its most valued inflation indicator.

GDP Data Lag: The absence of economic growth data makes it difficult to comprehensively assess the economic situation.

This data fog places The Federal Reserve (FED) in a dilemma. A 25bp rate cut in October is almost certain, as market expectations have already formed, and a sudden change would trigger severe market volatility. However, the subsequent rate cut path is full of uncertainty. If the government continues to be shut down, the The Federal Reserve (FED) may be forced to pause rate cuts and wait for data to recover before making decisions. Conversely, if the The Federal Reserve (FED) chooses to continue cutting rates in the absence of data, it may face the risk of policy mistakes.

Trump puts pressure to drop 300 basis points, political pressure unprecedented

President Donald Trump has exerted pressure on the Federal Reserve (FED) in various forms. Since taking office in January, he has repeatedly criticized the FED's interest rate decisions, calling for a three percentage point cut in rates to boost the lagging U.S. real estate market and reduce interest payments on national debt. Reports suggest that he will push for more aggressive measures to stimulate economic growth before 2026.

Trump's demand for a 3 basis point cut (i.e., 300 basis points or 3%) is an extremely aggressive request. The current federal funds rate is in the range of 4.25% to 4.50%, and a 3 basis point cut would bring the rate down to 1.25% to 1.50%, which is close to zero interest rate levels. Such a magnitude of rate cut is usually only implemented during severe economic recessions or financial crises, such as the 2008 financial crisis and the early stages of the pandemic in 2020.

Trump's motivations for exerting pressure are multifaceted. First is the real estate market. High interest rates have increased mortgage costs, suppressing home sales and construction activity. Lowering interest rates can reduce borrowing costs and boost the real estate market, which benefits Trump's supporter base (many of whom are real estate investors and builders). Second is the interest payments on national debt. The U.S. government debt exceeds $35 trillion, with annual interest payments exceeding $1 trillion. Lowering interest rates can reduce the cost of newly issued bonds and lessen the government's fiscal burden.

However, the independence of The Federal Reserve (FED) is the foundation of its credibility. If the FED is perceived as yielding to political pressure rather than making policy decisions based on data and economic judgment, it will undermine its credibility in the market. Historically, the independence of the FED has been tested many times, but overall, it has successfully maintained a relatively independent decision-making authority. Whether Trump's public pressure will affect the FED's decisions will be a key focus of observation.

The uncertainty of the sequential meeting approach and future easing path

Federal Reserve Chairman Powell urged the Fed to adopt a “gradual meeting” approach to interest rate cuts. The Fed will hold a meeting on October 29 to determine the next course of action. Some economists interpret Powell's recent comments about the “gradual meeting” approach to interest rate cuts as a moderate and cautious easing path, rather than hastily implementing aggressive stimulus measures.

Economists surveyed by Reuters and other media outlets unanimously believe that there will be another rate cut this week, with at least one more cut before the end of the year. However, debates within the Federal Reserve (FED) and potential unexpected data could alter this forecast. If the government reopens and the latest data shows a rebound in inflation or strengthened job growth, the Federal Reserve (FED) may slow down its easing measures. Conversely, prolonged shutdowns or deteriorating labor indicators would increase pressure for further and faster layoffs.

For investors, the certainty of an interest rate cut by The Federal Reserve (FED) and the uncertainty of the subsequent path create a unique market environment. An interest rate cut in October is almost certain, providing short-term support for risk assets. However, interest rate cuts in December and beyond depend on data performance and the resolution of the government shutdown, and this uncertainty may trigger market volatility. Traders should closely monitor the progress of the government shutdown, economic data for November and December (if released), and Powell's statements at the press conference following the FOMC meeting, as these will provide clues about the subsequent policy path.