The Federal Reserve's interest rate meeting is approaching. Why is a cautious 25bp cut more likely?

Jessy, Golden Finance

With the Federal Reserve's interest rate meeting approaching, US President Trump stated that the Fed will implement its first easing policy in nine months at this meeting, and he expects the Fed to "cut rates significantly."

On September 10th, the US Bureau of Labor Statistics released its latest report, showing that US PPI data for August fell short of expectations across the board and unexpectedly turned negative month-over-month, the first time in four months. This further bolstered the Fed's case for a rate cut. Following the release of the data, traders increased their bets on a 50 basis point rate cut in September. According to CME's "FedWatch," the probability of a 50 basis point cut in September has risen to 10%, while the probability of a 25 basis point cut is 90%. As expectations of a September rate cut have resurfaced, US stocks have reached new highs.

A rate cut seems certain, but I believe a cautious 25 basis point reduction is more likely. Will the US continue to cut rates after this, and will the crypto bull market continue? Why is a 25 basis point rate cut more likely? Despite US President Trump's calls for a "substantial rate cut" of 50 basis points or more, and some traders betting on such a move, the market consensus (CME data indicates a 90% probability) remains for a 25 basis point rate cut. This represents a "hawkish" rate cut, meaning that while the Fed is easing, it will also attempt to manage market expectations and avoid appearing overly panicky. They prefer a gradual approach, monitoring data as they go, and leaving room for future policy decisions. A 25 basis point cut is more likely because core inflation has fallen significantly from its peak, but is likely to remain stubbornly stuck in the 2.5%-3.0% range, slightly above the Fed's long-term 2% target. This gives the Fed reason to begin easing its overly tight policy, while remaining cautious about moving too quickly or too aggressively. Furthermore, the symbolic significance of this year's first rate cut is immense. A 25 basis point rate cut, accompanied by cautious wording in the post-meeting statement, is the safest way to initiate easing while preventing excessive market excitement. A 50 basis point rate cut would be interpreted by the market as a sign of serious economic trouble, potentially triggering panic. The first rate cut would initiate a slow and cautious easing cycle. The market should not expect a return to the zero interest rate era of the pandemic. A more likely scenario is 25 basis point rate cuts every other meeting (or every quarter). The pace and endpoint of subsequent rate cuts will depend entirely on whether inflation can successfully return to the 2% target. If inflation data fluctuates, the Fed may pause its rate cuts or even reassess its course. Against the backdrop of slowing economic growth, the Trump administration would undoubtedly welcome lower interest rates, which would help reduce the interest burden on government debt and boost consumer and business confidence ahead of the election cycle. Therefore, the Trump administration is likely to continue to publicly or privately support the Fed's initiation of rate cuts. Short-term market trends after expectations are fulfilled: The start of a cycle of interest rate cuts will undoubtedly be a significant structural positive for risky assets, including crypto assets. This first rate cut in 2025, taking place against the backdrop of confirmation that the inflation threat has been mitigated and that the economy needs support, carries a more significant signal and has a more far-reaching impact. First, risk-free interest rates (such as Treasury yields), the anchor for all asset pricing, will enter a downward trend, directly boosting the valuations of long-term assets like stocks and real estate. The reduced appeal of holding cash or bonds will drive large-scale capital outflows from safe-haven instruments like money market funds and reallocate them to risky assets. Lower borrowing costs will improve corporate profit margins and stimulate new capital investment, thereby boosting market expectations for future earnings. When the most likely 25 basis point rate cut occurs, as it's widely anticipated, the most likely scenario is a post-shoe drop. Since the market has already priced in a 25 basis point rate cut, for example, US stocks have already reached new highs, risk assets may not see a sharp surge upon the official announcement. Instead, they may experience a brief pullback or volatility due to profit-taking. Market focus will quickly shift to the Fed's post-meeting statement and Powell's speech, seeking clues about the path of future rate cuts. If the Fed unexpectedly cuts by 50 basis points, or sends a clear signal in its statement that rate cuts will continue, this would far exceed market expectations and could lead to a short-term surge in risk assets. However, this would quickly fall back, and the market outlook would be even more complex. A 50 basis point rate cut would be interpreted by the market as a sign of serious economic problems, which could cause market panic. Finally, there's the least likely scenario: Although the Fed cut rates by 25 basis points, the statement was strongly worded, suggesting this is the last cut or that the threshold for future rate cuts is high. The market will interpret this as a "hawkish rate cut," and risk assets may fall in response. However, if the rate cut is only 25 basis points, and there's a signal that further gradual rate cuts will follow, then from a macro perspective, crypto assets will continue to rise in the long run. In particular, if Bitcoin can rise and gain a foothold, then the altcoin market is highly anticipated, potentially leading to a strong rebound. For investors, reducing leverage is crucial for specific transactions, and being prepared to buy at the bottom of the market should the market dip.