25 basis points are a "done deal," 50 basis points are "very difficult"—when it comes to the Fed, the market "wants more."

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This week’s FOMC rate decision is expected, with the market convinced that the Federal Reserve will cut rates by at least 25 basis points. However, this can no longer satisfy aggressive expectations, as investors have already priced in a series of cuts extending through 2026.

Currently, financial markets generally believe that concerns over employment will dominate this week’s rate decision, and that the Fed will communicate a dovish tone. The market has already factored in expectations for the Fed to continue cutting rates through 2026 to avoid a recession. This optimism has pushed U.S. Treasury yields to multi-month lows and sent U.S. stocks to repeated record highs.

In the bond market, the benchmark 10-year Treasury yield is near its lowest since April. The S&P 500 Index is approaching an all-time high, and the Nasdaq 100 Index has just recorded its longest winning streak in over a year.

However, as inflation remains above target and the effects of tariffs on prices are still unfolding, analysis suggests that Fed Chair Powell and other officials may send signals indicating investors are overly aggressive, causing a repricing of assets. Powell’s comments and the Fed’s “dot plot” interest rate projections are key focuses for this decision.

A 25 basis point cut is almost certain; a 50 basis point cut is a small probability

Market expectations for a 25 basis point Fed rate cut this Wednesday are now close to 100%. Jack McIntyre, bond portfolio manager at Brandywine Global Investment Management, said, “My gut tells me it’s 25 basis points. The question is whether the Fed will emphasize employment over inflation in its statement.”

Media analysis points out that while the 25 basis point cut is a consensus, there is still a small probability of a 50 basis point cut amid signs of rapidly slowing U.S. job growth. This judgment will largely depend on how the Fed weighs the contradiction between a weakening labor market and resilient inflation.

Optimism among investors that the Fed will begin a rate-cut cycle has already pushed asset prices higher. In the bond market, the 10-year Treasury yield is hovering near its lowest since April. In the stock market, the S&P 500 is approaching an all-time high, while the tech-heavy Nasdaq 100 set a new record last Friday, logging its longest winning streak in over a year.

Meanwhile, after experiencing its worst first-half decline since 1973, the dollar has struggled to rebound, partly due to expectations of substantial Fed rate cuts.

However, some equity traders are hedging against potential volatility shocks, in part because the market has fully priced in a 25 basis point cut. Options traders are betting that the S&P 500 will swing about 1% in either direction on Wednesday, which would be the index's largest single-day move in about three weeks.

Inflation and tariffs remain concerns—focus on dot plot and “dissenting votes”

Bets on continued rate cuts face a core risk: Fed officials may believe investors are overreacting.

Currently, the inflation rate stubbornly remains above the Fed’s target, and the secondary effects of tariffs on prices have yet to fully manifest. These factors may drive the Fed to issue a warning, signaling that market expectations for monetary easing exceed the central bank’s plans.

According to Bloomberg strategist Michael Ball, “Although inflation remains sticky but has not re-accelerated, labor data is weakening, and consumer spending is stable, traders are increasingly weighing the possibility of the Fed taking a more aggressively dovish path—and the potential for this to support further gains in U.S. Treasuries.” JPMorgan’s trading desk also cautioned that this meeting could turn into a “sell-the-news” event, causing investors to take profits and pull back funds.

For investors, the wording of this week’s statement, the dot plot, and the composition of the voting results will be key to gauging the Fed’s future policy direction.

Gareth Ryan, Managing Director at IUR Capital, believes that the degree of easing reflected in the dot plot is critical. He says if the dot plot confirms more cuts before year-end and in the first quarter of 2026, he expects little reaction from the stock market. “But if the dot plot’s signal for a rate cut in the first quarter next year isn’t clear enough, that opens the door to more substantial market volatility.”

Finally, political factors also add complexity to this meeting. Trump’s economic adviser, Stephen Miran, could be confirmed as a Fed governor and participate in decision-making before this week’s meeting.

Vineer Bhansali, founder of asset management firm LongTail Alpha, noted that investors should watch the voting results at this meeting. He said if the Fed cuts by 25 basis points and no policymakers (or possibly only Miran) vote for a larger cut, the market will interpret this as a hawkish signal.

“The market is now betting on a fairly politicized Fed that will be overly accommodative,” he said. “That notion itself is dangerous.”

Risk Disclosure and DisclaimerThe market has risks; investment should be cautious. This article does not constitute personal investment advice and does not take into account any individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their circumstances. Any investments made based on this are at your own risk. ```