2025-09-16
FOMC Rate Cut Imminent: In-Depth Analysis of Market Expectations and Risks
As the September 16-17, FOMC meeting approaches, the market widely expects the Federal Reserve to announce its first rate cut of the year by 25 basis points, lowering the target range from 4.25%-4.50% to 4.00%-4.25%. This expectation is mainly driven by significant weakening in the U.S. labor market, with August nonfarm payroll additions stagnating and previous months’ data substantially revised downward, increasing the need for monetary easing to support the economy. Meanwhile, inflation as measured by the Personal Consumption Expenditures (PCE) price index showed August year-over-year growth of 2.79% for headline and 2.99% for core PCE, stabilizing around the Fed’s target and providing room for a rate cut.
Detailed Data Performance:
Labor Market: August nonfarm payroll gains stalled, with labor demand cooling as reflected by downward revisions to prior data.
Inflation Indicators: Core PCE inflation rose slightly to 2.99% YoY in August but remains near the Fed’s 2% target.
Market Pricing: CME FedWatch places the probability of a September rate cut at 98%-99%, with markets pricing in two additional 25-basis-point cuts by year-end.
Bond Market Reaction: U.S. 3-month Treasury yield dropped to 4.01%, 2-year yield at 3.54%, reflecting strong expectations of easing.
Risk Points: Experts warn that rate cuts may fail to effectively boost weakened manufacturing and housing sectors, and overly optimistic market bets on easing could threaten stock and bond market stability.
In summary, market sentiment ahead of the FOMC rate cut is highly anticipatory, with easing seen as a rational response to labor market softness and stable inflation. In the short term, equities and bonds are expected to benefit, with a weaker dollar and potentially higher gold prices. However, over the medium term (within six months), risks remain that the economy’s rebound might be sluggish, especially if manufacturing and housing do not improve significantly, potentially slowing an overall recovery. Additionally, political pressures and over-optimistic market positioning contribute to policy uncertainty, suggesting investors should adopt a cautious stance going forward.