The interest rate cut in September is about to hit, and the market may experience a roller coaster ride. Please fasten your seatbelts and wear your hard hats!

Original Title: Interest Rate Cuts Are a Foregone Conclusion, Three Major Mysteries Remain to Be Solved

Original author: BitPush

Reprinted: White55, Mars Finance

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

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

The Fed has finally decided to initiate a rate-cutting cycle, primarily due to the ongoing weakness in the U.S. labor market and increased confidence among officials that the inflation caused by tariffs may only be a temporary phenomenon.

According to data from the Labor Department, in the three months ending in August, the average monthly increase in jobs was only about 29,000, the weakest three-month growth since 2010 (before the pandemic). Additionally, the number of unemployed people 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. The employment data released last week was also revised preliminarily, showing that the fundamentals of the U.S. labor market have been weaker than previously thought since the start of 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 the concern within the Federal Reserve about achieving its "maximum employment" mandate, which has now surpassed worries about inflation.

However, although interest rate cuts have become a foregone conclusion, the uncertainty surrounding this meeting and future monetary policy has reached unprecedented heights. These unresolved factors are the real key to influencing financial markets and asset pricing.

Suspense 1: The "dot plot" of future interest rate paths – How many times will there be rate cuts this year?

As the 25 basis point rate cut has been highly priced in by the market, traders will no longer focus on "whether to cut rates," but will instead focus 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 attention on the "Dot Plot" - which reflects the FOMC members' expectations for future interest rate levels.

Expectations of Continued Rate Cuts: Traders are boldly betting that the Fed will not implement a "one-time" rate cut, but will instead initiate a cycle. According to the CME's FedWatch tool, the market believes that there is over a 70% probability of continued rate cuts in October and December.

Potential Divergence Signals: Goldman Sachs economists expect the "dot plot" to show two rate cuts instead of three, but "the divergence will be small." If the Fed ultimately implies 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 suggests three or more rate cuts, it would be a significant dovish positive.

The view of Goldman Sachs economists is that the key to this meeting is whether the committee will hint that "this will be the first in a series of consecutive rate cuts." They expect 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 full of uncertainty. Although most 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 very likely to cast a dissenting vote in favor of a more substantial rate reduction. Treasury Secretary Scott Bessent has also publicly encouraged the Fed to undertake a "comprehensive" rate cut.

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

This split will highlight the increasing policy divergence within the committee, making the future actions of the central bank more difficult to predict.

Suspense Two: Powell's "Tone" - 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 "transitory" or "persistent"?

Federal officials generally believe that the inflation rise triggered by the tariff policies of the Trump administration may be only temporary.

San Francisco Fed President Daly stated, "Tariff-related price increases will be one-time." 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, against the backdrop of a weak labor market and an unstable economy, the flexibility of businesses to raise prices is reduced, thus there is not much sustained inflation 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 a strategist from B. Riley Wealth Management stated, his tone will be "pragmatic, but more dovish," indicating that the Fed needs to defend its mission of full employment more vigorously.

Data dependency and future policy flexibility

Traders will closely watch whether Powell will provide any soft hints regarding actions in October. If he emphasizes "data dependence" and suggests that there is still significant room for policy adjustments in the future, this will leave suspense in the market, causing 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 in part from the political turmoil surrounding the core powers of the Fed. The persistent pressure the Trump administration has exerted on its independence is the "elephant in the room" that cannot be ignored during the meeting.

The rapid rise of new directors

Stephen Moore, President Trump's chief economic advisor, was confirmed by the Senate on Monday and sworn in on Tuesday morning, in time to gain a vote in this FOMC meeting. This process, which typically takes months, was expedited and is seen as Trump's desire to have Moore cast a crucial vote in support of a "large rate cut" at the September meeting. Moore himself stated that he would think independently, but his swift confirmation is undoubtedly a reflection of political pressure influencing the Fed's operations.

Cook's dismissal controversy

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 firing order, Cook is still able to vote at this meeting, but her position remains in limbo as the lawsuit is ongoing.

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

Summary: The market is waiting for signals rather than 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 said, the Fed's "dual mandate is under 'stress'," and the increasing politicization complicates the situation further. The market will closely monitor every word from Powell, looking for signals to guide portfolio allocation.