local timeSeptember 17th,The Federal Reserve announced a 25 basis point rate cut. According to reports, this is the first rate cut by the Federal Reserve in nine months and will cut the benchmark rate to a target range of 4% to 4.25%, the lowest level in nearly three years. However, Federal Reserve Chairman Powell quickly poured cold water on the market's expectation of a "restart of the easing cycle" at the subsequent press conference. According to reports, Powell characterized the rate cut as a "risk-managed" rate cut. "There is no guarantee that this rate cut is the beginning of additional rate cuts," he said.
U.S. President Donald Trump has repeatedly asked Powell to lower interest rates, and even accused him of being “Mr. Too Late” forining a high interest rate policy, but three days earlier, on September 14, Trump said he expected the Fed to announce a “significant reduction” at a meeting this week.
Currently, the focus of market attention is on how fast and profound this round of “re-calibration” will be; there are already differences between the latest market expectations and the Fed’s own forecasts.
The average forecast by the Fed officials suggests that interest rates will be lowered twice this year, but only once throughout 2026.
The current mainstream expectation on Wall Street is that the Fed's pace of interest rate cuts will be relatively sustained. Wall Street traders expect the Federal Reserve to cut interest rates twice more at the remaining two meetings this year and two more in the first half of 2026, according to data from CME's Fedwatch tool. This view is supported by many economists' forecasts, with reports saying they expect at least two more rate cuts next year.
Consensus: It may drop twice more during the year
Disagreement: Will it drop "twice" or "once" next year?
First, on two meetings in October and December 2025, the forecasts of market traders, economists and Federal Reserve officials pointed to the same outcome: two more interest rate cuts.
Wall Street traders expect two more interest rate cuts this year.The latest "Dot Plot" released on 17th shows that the average forecast of the Fed's 19 decision makers suggests that there will be two more interest rate cuts in 2025.
Within the Federal Reserve, this consensus was more fragile. The spot chart showed that officials who supported the “two more drops this year” overcame officials who supported the “one more drops this year only” with a weak advantage of only 10 to 9.
The real difference between market expectations and the Federal Reserve appeared in the forecast for interest rate cuts in 2026. The market expects the Federal Reserve to need to “re-calibrate” interest rates at a faster rate (i.e. three to four rate cuts per year, a total of five).
According to reports, the median forecast of Fed policymakers: "One more in 2026 and another in 2027."
Among them, two officials expect four interest rate cuts in 2026. Three officials expect to cut interest rates three times next year. Other officials expect only one rate cut. Commenting on this, Sima Shah, chief global strategist at Principal Asset Management, said: "Next year's dot plot is a mixture of different perspectives that accurately reflect the confusing economic outlook."
Why are the markets “more pigeon” than the Federal Reserve?
Behind this difference in expectations lies the difference in confidence between the Fed and the markets in the economy’s “soft landing.”
Analysis suggests that Fed Chairman Powell’s release of the hawkish (i.e. more reluctant to lower interest rates) signal suggests that the Fed official wants to take “prudent steps,” as BNY Investments chief economist Vincent Reinhart said: “We’re not yet at the time to ‘break the glass (emergency calls) ... it’s just a re-calibration.”
However, markets are clearly more worried about economic data, betting that the Fed will be forced to act faster. The U.S. government announced last week that its estimate of new jobs in the year ending March 2025 may be significantly revised down by 911,000. Tully Legg, chief market strategist at Wealth Consulting Group, commented: "If this doesn't sound the alarm for the Fed from an economic perspective, I don't know what it will do."
Despite differences in the rate at which the target is achieved, either the market’s expected “two-five-year” interest rate cuts or the Federal Reserve’s official “three-four-year” interest rate cuts are the same.According to analysis, both sides believe that a series of interest rate cuts will eventually bring the fund’s interest rate down to around 3% levels, which is widely regarded as neither stimulating nor slowing down the “neutral level” of the economy.
The Impact:Markets reacted confused, stock markets rose
The hybrid signals from the Fed have confused the financial markets at first.
Following the announcement of the interest rate cuts, the global stock markets and the U.S. dollar were shaken. The main Wall Street stock indices replicated the end-of-the-sale decline after the slash: the Dow Jones Industrial Average Index rose 0.6%, while the S&P 500 and the Nasdaq Comprehensive Index both recorded a decline.
The reaction of the bond market has further highlighted this uncertainty: short-term government bond yields have dropped, but long-term government bond yields have increased.Analysis suggests that this is a potential problem for the Federal Reserve trying to avoid stagnation.
Analysts at New Bank Australia said in the report that the Federal Reserve’s decision and presentation tone was “balanced and restrained, not at all pigeonish,” while analysts at the Dutch International Group said “the market is not convinced of these mildest soft landing forecasts and believes the Federal Reserve may need more action.”
Red Star News reporter Deng Shuyi
Editor Deng Peiguang