29 Sept 2025
The Federal Reserve is poised for a crucial meeting where markets widely anticipate a 25 basis point interest rate cut to mitigate a weakening labor market. Concurrently, US consumers demonstrate remarkable resilience amid ongoing trade wars and tariffs, maintaining robust spending habits despite economic headwinds.
The market widely anticipates a 25 basis point reduction in the interest rate at tomorrow's Federal Reserve meeting, with this gradual easing cycle predicted to continue through subsequent sessions in October, December, January, and March. The Federal Reserve is also expected to lower its projections for growth and inflation while slightly increasing its unemployment forecast.
A larger 50 basis point rate cut, similar to one enacted last September, is considered nearly impossible for the upcoming meeting, though some members advocate for more aggressive easing due to the deteriorating labor market.
Most Federal Reserve members maintain a cautious stance, primarily due to concerns about the inflationary impact of Trump's tariffs, making a 25 basis point reduction the most probable scenario. Not all members are fully convinced that initiating rate cuts in September is appropriate, with some emphasizing the persistent importance of inflation and the possibility it might not be transitory.
The Fed's official statement will likely revise down the committee's assessment of the labor market, potentially replacing the 'solid' description with an acknowledgment of rising unemployment and slower hiring trends. While inflation remains somewhat high, the statement might exercise more caution in directly signaling future inflation policy.
Further interest rate cuts are anticipated after September, but the Federal Reserve is unlikely to provide explicit, strong guidance on its actions for the remainder of the year. The statement will emphasize that future rate adjustments are contingent on incoming data and evolving economic outlooks, with a possibility of continued easing at a slower pace in the October 29th meeting.
The Federal Reserve's September Summary of Economic Projections (SEP) is expected to reflect a more expansionary stance, with the median dot plot potentially indicating a total of 75 basis points in rate cuts over 2024-2025, an increase from a previous 50 basis points. The median for the upcoming year is projected to be 3.125%, driven by a weakening labor market and reduced demand.
A survey of economists revealed that approximately 50% expect two rate cuts by the end of the year, while 40% anticipate three reductions, aligning with overall market expectations of two to three cuts.
In the event of an unlikely 50 basis point cut (8% market probability), the dollar would likely see a significant decline while the S&P 500 would surge. The main scenario of a 25 basis point cut (93% probability) is expected to have a neutral impact on the dollar and a positive effect on the S&P 500. A decision to keep rates unchanged (0% market probability for this meeting) would likely lead to a stronger dollar and a sharp drop in the S&P 500.
The Fed's statement holds moderate importance, with a potential hint of another cut in October (80% probability) leading to a neutral dollar and a bullish S&P. Emphasis on data dependency (99% probability) is unlikely to have market impact. Chairman Powell's press conference is also of moderate importance, as signals for future cuts (80% probability for next meeting) could weaken the dollar, and hints of more cuts in 2024-2025 would keep the dollar bearish.
The Senate confirmed Mr. Myron's challenging appointment to the Federal Reserve with a partisan 13-11 vote, making him eligible to attend tomorrow's meeting, which would be the Fed's first rate cut since last December. Mr. Myron, currently the head of the White House Council of Economic Advisers, has committed to an unpaid leave for his Fed role, though his long-term tenure is uncertain.
Democrats express strong concerns that Mr. Myron is excessively tied to President Trump and could politicize the Fed's monetary policy decisions, undermining its independence. President Trump is actively attempting to increase his direct influence over the central bank on the eve of a critical Fed meeting, a move that worries Democrats about the erosion of the Fed's autonomy.
Heavy US tariffs on imported goods, particularly from China, are significantly pressuring small American businesses, although the full impact on final consumers has been delayed by approximately one year. Importers are forced to pay tariffs within days of goods arriving at ports, often before sales, leading to a 730% year-over-year increase in demand for loans and credit to cover these immediate costs.
The latest retail sales report indicates that the American consumer remains resilient, continuing to spend despite the higher costs imposed by tariffs, a weakening labor market, and lower confidence. Overall retail sales increased by 0.6% month-over-month, exceeding the 0.2% forecast, with key segments like online sales, apparel, and sporting goods showing strong growth, partly due to back-to-school purchasing.
Despite concerns about a weakening labor market, robust consumer spending, which accounts for two-thirds of the US Gross Domestic Product, suggests that economic growth might remain strong in the third quarter. The Federal Reserve's anticipated rate cut aims to preempt a deeper economic slowdown, especially given the current strength of the consumer.
The monthly industrial production data is an important upcoming release that will shed light on the pressures faced by the manufacturing sector and the continued impact of various costs.
The consumer, constituting two-thirds of the US economy's Gross Domestic Product, continues to show strong performance, suggesting economic growth might remain positive in the third quarter despite a weakening labor market.
| InsightCategory | KeyFinding | Detail |
|---|---|---|
| Fed Rate Cut Probability | 25 Basis Point Cut | Market's most probable scenario (93% chance) for the upcoming Fed meeting, expected to have a neutral dollar impact and bullish S&P reaction. |
| Fed Rate Cut Probability | 50 Basis Point Cut | Highly unlikely (8% market chance) for the current meeting, but would significantly weaken the dollar and boost the S&P 500 if it occurred. |
| Fed Monetary Policy Stance | Caution and Data Dependency | Most Fed members remain cautious due to inflation concerns from Trump tariffs; future rate adjustments will heavily rely on incoming economic data. |
| US-China Trade War Impact | Pressure on Small Businesses | Heavy tariffs, especially from China, are significantly pressuring small American businesses, leading to delayed investment and increasing demand for loans to cover immediate tariff costs. |
| US-China Trade War Impact | Delayed Consumer Impact | Consumers have not yet fully felt the tariff burden due to a roughly one-year delay in price transmission to retail stores, though importers are feeling immediate strain. |
| US Economic Resilience | Strong Consumer Spending | The latest retail sales report shows American consumers are resilient and continue spending robustly, contributing significantly to GDP despite tariffs and a weakening labor market. |
| Federal Reserve Independence | Trump's Influence Concerns | President Trump's efforts to increase direct influence on the central bank, exemplified by Myron's appointment, raise Democratic concerns about the politicization of monetary policy and Fed independence. |
