After Nine Months, Fed May Restart Rate Cuts Tonight

Introduction: (1) It is widely expected that, driven by the recent slowdown in employment growth, Federal Reserve officials will cut interest rates by 25 basis points at the conclusion of their two-day meeting on Wednesday; (2) However, although the Fed’s resumption of rate cuts after a nine-month hiatus is already enough to attract significant attention, the highlights of this special rate decision night clearly go far beyond just this.

As described by the renowned journalist Nick Timiraos, known as the "new Fed whisperer," the Federal Reserve is about to hold one of the most unusual policy meetings in years tonight...

It is widely expected that, influenced by the recent slowdown in employment growth, Federal Reserve officials will lower interest rates by 25 basis points at the conclusion of their two-day meeting on Wednesday. At last month's Jackson Hole Global Central Bank Conference, Fed Chairman Powell had already hinted at the proximity of a rate cut when he shifted his focus to prioritizing employment issues rather than the persistent concerns about inflation.

However,Although the Federal Reserve’s resumption of interest rate cuts after a nine-month hiatus is already remarkable in itself, the highlights of this special rate-setting night clearly go far beyond that—never in history has the Fed, until this week, finalized the list of officials attending a rate-setting meeting only on the very last day before the meeting itself…

On Monday this week, the U.S. Senate narrowly approved the nomination of White House Economic Adviser Chairman Milan to become a Federal Reserve Board member by a single vote; also on Monday, Federal Reserve Board member Cook managed to "luckily" remain on the Board after going through a lawsuit with the Trump administration. It is not difficult to foresee that these two individuals—Trump’s "loyalists" and "thorn in the side"—are likely to first engage in a "war of words" within the Federal Reserve. Earlier this week, Trump explicitly called on the Federal Reserve to "cut interest rates significantly"!

Milan will be sitting in Kugler's seat tonight, just one seat away from Cook.

Setting aside these political disputes, investors are also expected to closely focus on Federal Reserve Chair Jerome Powell’s remarks this week and seek clues about the future path of interest rates from the latest dot plot and quarterly economic projections. These forecasts will be released simultaneously with the interest rate decision at 2 a.m. Beijing time on Thursday, with Powell’s press conference beginning 30 minutes later.

The following is a multi-dimensional preview by Cailian Press of tonight's Federal Reserve decision:

How much will the Federal Reserve cut interest rates tonight: 25 or 50 basis points?

According to the CME Group's FedWatch Tool, the probability of the Federal Reserve lowering interest rates by 25 basis points tonight is approximately 96.0%, while the probability of a 50 basis point cut is 4%.

In recent weeks, a series of disappointing data has undoubtedly intensified market concerns: the U.S. labor market may be facing a more severe slowdown, which could in turn dampen consumer spending and economic growth. However, given that the inflation rate remains above the Federal Reserve's 2% target, and that Trump's tariff measures could further drive up inflation in the coming months, some Federal Reserve decision-makers are cautious about taking action too quickly.

Therefore,Compared to the significant 50 basis point rate cut last September, the market currently overwhelmingly expects a 25 basis point rate cut by the Federal Reserve tonight. Of course, as mentioned in our earlier report today, some interest rate market traders are increasing their bets.It is expected that the Federal Reserve will implement at least one significant rate cut of 50 basis points in the remaining three policy meetings this year. Some bold individuals are even betting heavily that this will happen tonight, so for now, the possibility of a 50 basis point rate cut cannot be completely ruled out.

According to findings by researcher Ed Bolingbroke, there was the largest block trade ever recorded in the front end of the Monday curve for federal funds futures—the trade involved 84,000 contracts of the October federal funds futures, corresponding to a risk exposure of $3.5 million per basis point move. Bolingbroke pointed out that both the pricing and timing of the block trade were characteristic of a buyer. Given that the current swap market has fully priced in a 25 basis point rate cut, this move may suggest that the mysterious trader is hedging the risk of a direct 50 basis point cut in Wednesday’s FOMC decision.

Voting Watch: Will the Fed Be More Divided Tonight Than in July?

At the last Federal Reserve meeting in July, an unprecedented situation occurred where as many as two Federal Reserve governors (Waller and Bowman) cast dissenting votes against the decision to maintain the status quo.

Facing tonight's interest rate meeting,Many observers of the Federal Reserve have anticipated that there may be even more division within the Federal Reserve than in July. They believe that if the Fed is expected to lower interest rates by 25 basis points this month, there may be opposing opinions from both hawks and doves: some officials may support a larger rate cut, while others may prefer to keep rates unchanged.

Deutsche Bank strategist Jim Reid has warned that divisions within the Federal Reserve may reach the sharpest levels in decades—Chairman Powell's social skills may face unprecedented tests this week.

He believes that there may be differing opinions within the FOMC. On the dovish side, there may be three FOMC members calling for a 50 basis point rate cut, while on the hawkish side, one or two members may vote to keep rates unchanged.It is possible that this will be the first meeting since 1988 with at least three members dissenting, and it may also be the first meeting since September 2019 in which both hawks and doves have officials expressing dissenting opinions.

The concerns and speculations of investment banks are not difficult to understand. With the addition of Milan, the chief architect of the "Mar-a-Lago Agreement" and chairman of the White House Council of Economic Advisers, to the Federal Reserve, the faction within the Fed that is viewed as Trump's "own people" is undoubtedly growing stronger. Whether it is Milan, Waller, or Bowman, any of them could vote tonight in favor of the Federal Reserve taking more significant rate cuts.

At the same time, the stance of the hawkish faction within the Federal Reserve should not be underestimated—let’s not forget that in June’s “tight” dot plot, as many as seven Fed officials supported no rate cuts this year, just one less than the number of officials who supported two rate cuts.

Dot Plot Highlights: How Many Rate Cuts Will There Be This Year?

In the quarterly decisions of the Federal Reserve, the interest rate dot plot has always been one of the most watched focal points by market participants. Tonight's dot plot may also be very important...

From the general analysis of industry insiders, there are three main highlights in the Fed's dot plot this time.Firstly, the most noteworthy aspect is the interest rate cut path for 2025—if a 25 basis point cut occurs tonight, how many times will the Federal Reserve cut rates in the remaining two meetings of the year? Secondly, whether the dot plot's forecast for 2026 will show increased dispersion could reflect whether internal disagreements among Federal Reserve officials regarding next year's policy path are intensifying. Lastly, after Milan joins the Federal Reserve, how will the Fed adjust its forecast for the long-term neutral interest rate?

Among them, the interest rate cut path for 2025 is undoubtedly one of the key focal points most closely tied to market trends and has the greatest impact. In the dot plot released in June, the Federal Reserve maintained its forecast of two rate cuts this year, but as mentioned earlier, there was considerable internal disagreement within the Fed at that time— the number of members supporting two rate cuts this year was almost equal to the number of those advocating for no cuts.

And this time,The market’s focus is undoubtedly on whether the Fed’s dot plot forecast for two rate cuts this year can be revised to three—this would align more closely with the latest pricing in the interest rate markets. In other words, if the dot plot’s expectation for rate cuts this year moves toward three, this decision may be interpreted by the industry as “dovish”; but if it remains at two, it can only be regarded as a “hawkish” rate cut.

It is worth mentioning that some industry institutions are currently attempting to "draw the dot plot for the Federal Reserve" based on their own guesses. For example, Bank of America has made the following predictions — even marking the points they believe represent different officials. In terms of the median,Bank of America still expects the dot plot to show two rate cuts within the year.：

Goldman Sachs has a similar forecast: the firm also expects the dot plot to show two rate cuts within the year.After this month's interest rate cut, there will be another cut by the end of the year, bringing the median interest rate down to 3.875%.

Press conference highlights: How will Powell express his grievances?

Without a doubt, the person under the most pressure tonight during this Fed rate decision meeting is Fed Chairman Jerome Powell. After the press conference following the meeting, it is almost certain that the media will ask Powell about some behind-the-scenes details of this meeting, such as the stance and attitude of the "newcomer" Adrian Millar.

At the press conference, Powell's views on the current state of the U.S. economy and the direction of interest rates will undoubtedly attract attention from all parties.

Nick Timiraos of "New Federal Reserve Communications" stated that given the strategic uncertainty, what signals Powell will send beyond a rate cut this week will become a core issue. In his speech at last month's global central bank conference, Powell hinted that compared to inflation, he is more concerned about the labor market than some of his colleagues. Powell believes that Fed officials can assume tariff-related price increases are temporary unless there is evidence to the contrary — a stance that echoes the Fed's initial misguided response to inflation in 2021.

Timiraos pointed out that the question is whether he will further emphasize these concerns after the weak August jobs report. If Powell makes such an indication, it will confirm market expectations of a rate cut by the Federal Reserve in the upcoming meetings. However, this may need to overcome the unease from colleagues—they still have doubts about the level of the neutral rate and whether rates should be at a neutral level, and are reluctant to commit to such swift action.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, expects that.Powell may face a "challenging press conference" as he attempts to articulate the internal debates of the Federal Reserve.