Most banks expect the Federal Reserve to cut rates by 25 basis points (bps), a move already reflected in the market. This small reduction may not greatly affect markets unless there are changes in guidance to go along with it. Some banks, however, are predicting a larger 50 bps cut. This could weaken the USD, raise Treasury prices, and lift equities and gold. Banks that support the 25 bps cut include BMO, Barclays, CIBC, Goldman Sachs, JPMorgan, Morgan Stanley, Nomura, RBC, Scotiabank, and Wells Fargo.

Market Reaction to Different Expectations

Standard Chartered and Société Générale foresee a more aggressive 50 bps cut. Such a cut might lead to a strong market reaction, unlike the modest change anticipated from the widely expected 25 bps cut. The market is currently fully pricing in a 25 bps cut for the upcoming Fed meeting. Since this is the common expectation, the cut itself probably won’t cause a significant move. Traders should pay more attention to the Fed’s guidance and any unexpected changes in their economic outlook. Recent economic data supports the idea of a first easing step. The latest jobs report from August 2025 showed the unemployment rate rising to 4.2%, and last week’s CPI data indicated core inflation cooling to 3.1% year-over-year. These numbers provide the Fed with reasons to cut rates, but the inflation rate is still high enough that a larger 50 bps move would be surprising. With the expectation of a 25 bps cut, implied volatility on index options is high, with the VIX around 18. Traders believing the Fed will stick to this plan without any hawkish or dovish surprises might consider strategies that profit from a drop in volatility after the announcement. One way to do this is by selling options, such as short straddles on the SPX, to take advantage of the high premium before the event.

Positioning for Rate Cuts and Market Dynamics

For those betting on the less likely 50 bps cut, inexpensive out-of-the-money call options on equity indices offer a promising risk-reward balance. A large cut would likely spark a strong rally, causing these options to rise significantly in value. Similarly, buying call options on gold miners or put options on the U.S. dollar index would be a smart way to approach this scenario. Reflecting from our perspective in 2025, we remember how the market reacted to the Fed’s pivot that started in late 2023. The initial cuts didn’t lead to a sustained rally until there was confirmed guidance for continued easing. This history shows that the press conference and dot plot will be more crucial than the rate decision itself in determining market direction in the coming weeks. In the Treasury market, futures contracts for the 10-year note saw considerable buying ahead of the meeting. Traders expecting the bigger 50 bps cut have been purchasing call options on Treasury bond ETFs like TLT. If the Fed goes for the larger cut, we would likely see a sharp rally in bond prices as yields drop. Create your live VT Markets account and start trading now.

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