The Federal Reserve is set to restart its journey to a neutral interest rate after its last cut in December 2024. The Fed’s statement is likely to acknowledge the weakening labor market while keeping its focus on high inflation and uncertainty, without changing its quantitative tightening measures. Most members are expected to support a 25 basis points cut. However, surprises could occur with different voting patterns, such as a 50 basis points cut or some members voting to keep rates unchanged. The Summary of Economic Projections, especially the dot plot, is highly anticipated. The market expects a total easing of 148 basis points by the end of 2026, which includes three cuts in both 2025 and 2026. The Fed’s previous forecasts expected fewer cuts by 2026. Deviations from these market predictions, like fewer cuts in 2025, could be seen as hawkish.

Press Conference Focus

During the press conference, Fed Chair Powell is expected to discuss the current weakness in the labor market, which aligns with his recent comments. Any surprises could arise if he places more emphasis on inflation concerns than on labor weakness, or the other way around. This could change market expectations for the Fed’s future policies. In today’s meeting, the Federal Reserve is expected to announce the first interest rate cut since December 2024, likely a 25 basis point reduction. Recent data shows a clear slowdown in the labor market, with the August jobs report showing an addition of just 95,000 jobs and the unemployment rate rising to 4.2%. However, with Core PCE inflation still at 2.8%, the Fed is balancing the need to support employment against the need to bring inflation back to its target. Derivatives traders will focus on the new dot plot, which will indicate the Fed’s expectations for future rates. Currently, the market is pricing in nearly three more cuts this year and three more in 2026. If the Fed’s new projections indicate fewer than three cuts for 2026, this would be surprising and might lead to a sell-off in long-term interest rate futures. Market reactions will depend on any surprises in the rate decision itself. A 25 basis point cut is widely expected, but if the outcome is hawkish—like no cut or fewer members supporting a larger 50 basis point reduction—it could lead to a shift in short-term interest rate markets. We should closely observe the number of dissenters, as this will reflect the committee’s confidence in their future direction.

Powell’s Press Conference Tone

During his press conference, Powell’s tone regarding the labor market will be crucial. Following his focus on employment concerns at the August Jackson Hole symposium, traders will be attentive to any firm commitment to take action if weakness persists. Strategies that profit from increased bond market volatility, like straddles on Treasury ETFs, might be valuable for positioning ahead of significant market moves based on his comments. This is a key moment following the aggressive rate hikes of 2022-2023 and the long pause that characterized most of this year. Today’s guidance will set the trading landscape for the rest of 2025. If the Fed signals greater concern about economic slowdown than about inflation, it could increase expectations for future easing, affecting everything from SOFR futures to currency options. Create your live VT Markets account and start trading now.

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