The Federal Reserve's "hawkish interest rate cut" is a done deal tonight; will new opportunities arise?
The market generally expects the Federal Reserve to cut interest rates by 25 basis points tonight, bringing the rate down to the range of 3.5%-3.75%. This will be the third interest rate cut of the year. However, behind this rate cut, there has been significant internal conflict within the Federal Reserve, with divisions reaching what could be the highest level during Powell's tenure.
On one side, doves are concerned that the job market is cooling too quickly and support continued easing; on the other side, hawks are focused on inflation still exceeding the 2% target and oppose further "pumping money". This split forces Powell to adopt a "hawkish rate cut" strategy—essentially cutting rates but not showing dovishness, clearly telling the market "don't expect too much next time".
Powell's focus tonight is not on the rate cut itself, but on how to balance internal and external pressures through communication. He is likely to mimic the actions of 2019, raising the threshold for future easing immediately after cutting rates, emphasizing that "policy is close to neutral" and that the next steps must be based on significantly deteriorating employment data.
However, the awkwardness lies in the government shutdown causing a lack of key economic data, making this rhetoric seem somewhat hollow. The dot plot may indicate that there is only one or two more rate cuts left by 2026, but the market is currently betting on more, and the expectation gap in between will likely become the main reason for subsequent volatility.
To put it bluntly, the Federal Reserve tonight is less about regulating the economy and more about managing expectations. If Powell wants to stabilize the situation, he must convince hawks that there will be no more reckless easing while also making doves believe that "action will be taken if necessary".
Yet, amid such significant internal divisions, any ambiguous statements could trigger reverse interpretations in the market. If the dot plot or the press conference leans hawkish, U.S. Treasury yields could rise further, putting pressure on risk assets.
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