SUMMARY

The Federal Reserve’s meeting is about to happen on September 17 and has been the most looked upon event of the month. Market expecting a 25 bps rate cut which could be the first since December last year. The Fed is already under pressure to loosen up a bit considering cooling inflation, slowing job growth and global uncertainties. Market, however, is also paying close attention to Chair Jerome Powell’s tone and guidance for the months ahead. Most of the investors are already seeing it as the beginning of a potential easing cycle with more cuts expected later this year. 

As the US Federal Reserve prepares for its meeting to be held on 16-17 September, the market is buzzing with expectations. Economists, traders, and investors, all believe that the Fed might ease the policy by cutting interest rates. If this happens, it will be the first rate reduction since December last year.

Advertisement

For the past year the Fed has kept a strict stance towards keeping inflation in check while supporting economic growth. While inflation is still stubborn, it has begun cooling. Also, the labor market, which happened to be the core reason for keeping the rates high, has started softening. This means hiring is slowing down and unemployment is ticking. These are some mixed signals that are pressuring the Fed to act accordingly. A rate cut might aim to protect growth while keeping inflation in check.

Market’s expectations

Market consensus is leaning towards a 25 basis point cut. It is a cautious step signal easing without overcommitment. Some analysts are also keeping 50 bps on the table, citing weak inflation data and further softening of the labor market. However, the forecast of 50 bps is less likely, unless the Fed has some bold message to deliver.

One thing is clear, this meeting will not just be about the rate cut only. The investors are keeping an eye on the tone of the Fed’s statement. They will look out for projections of inflation and growth and how Chair Jerome Powell positions the path ahead. 

There are speculations that with these rate cuts, one will see the beginning of an easing cycle. With more expected cuts coming later in 2025, probably in the October and December meetings, this will bring more liquidity into the market.

What are the key drivers behind the expected cut?

Slower Job Growth: The latest employment data has shown cracks in the labor market. There are clear signs of slower hiring and unemployment ticking up. The Fed cannot ignore this weakening momentum and will have to work towards easing up on the cuts. 

Cooling Inflation: Irrespective of still being above 2% target set by the Fed, inflation is cooling off. This has given some room to breathe even though the tariffs, supply chain issues and import/export imbalances are still adding risk. 

Political pressure and global uncertainty: The Fed is under scrutiny and immense political pressure. There are ongoing debates and concerns around Fed board appointments and independence. Trade tensions and geopolitical risks add to the external pressure weighing down the growth. Under these circumstances, a cut could act as an insurance.

Market expectations and financial stability: The market is expecting a 25 bps cut and any deviation from this could jolt the market both positively or negatively. If the projections do not come out positive, then it could spark volatility even though the cuts are favorable.

Possible outcomes:

There are four main scenarios that can play out. First, if there is a 25 bps rate cut while the Fed’s tone remains soft and steering, then there is a high chance that the equity market could thrive. There could be a possible drop in bond yield and the dollar might weaken a little. Next is, 25 bps rate cut, but with a cautious tone. This will bring in mixed reactions. While it can be a relief to the overall market, the upsides will be limited and the volatility will continue to exist. Third, the Fed can call for a 50 bps cut, which is a long shot and can be huge. It can cause inflation fears to resurface. However, bond yield might rise and stocks may surge. Finally, there could also be no cut too, which can bring in immense negative surprises to the market. The shockwave of the news could make stocks fall, increasing volatility while strengthening the dollar.

September 16 and 17 can be a pivotal moment for market investors with mostly eyeing on 25 bps rate cuts. For businesses, lower borrowing costs will mean cheaper loans and easier expansions and enhanced cash flow. For consumers, it will bring relief from the debts arising from mortgages, credit cards and loans. For the crypto market, a weaker dollar will mean increased liquidity. Everything now relies on Powell’s comments, which can surprise the market both positively and negatively.

FAQ

Why is the Fed expected to cut rates?

The employment data revealed slower hiring and rising unemployment. This is visible cooling in inflation, even though it stays above 2%. All these factors have created required space for the relaxation in policy, supporting growth. 

What happens if the Fed cuts rates?

If the rate cuts do happen then there will be a visible rise in the equity markets. The bond yield might drop and the dollar might weaken. It could be greatly beneficial for the consumers and the businesses as they can thrive on the benefits of cheaper loans. 

What if the Fed doesn’t cut rates?

If such a scenario does appear, it will be taken negatively by the market and investors. The market will fall while the dollar strengthens.

How will this affect the crypto market? 

If rate cuts happen then it will bring in more liquidity to the market giving it the much required boos. However, if there is no rate cut, then the market will fall as investors will withdraw liquidity to manage their expenses.