Gambling on the Federal Reserve's "rate cut gift package," will investors crash this time?

According to Zhitong Finance APP, as the new week begins, investors' core concern shifts to whether Federal Reserve officials will dismiss the market's bets on the continuation of the interest rate cut cycle into next year.

Currently, the market not only bets that the Fed will announce a 25 basis point rate cut this Wednesday (with a slight possibility of an unexpected 50 basis point cut), but also expects the rate cut cycle to last until 2026 to combat the risk of economic recession.

This expectation has pushed U.S. Treasury yields down to several-month lows, helping U.S. stocks climb to historical highs and putting pressure on the dollar.

However, these bullish bets carry risks: Fed Chairman Jerome Powell and his colleagues may signal that investors' expectations are already ahead of reality—current inflation remains stubbornly above the central bank's target, and the impact of tariffs on prices continues to ferment. Against this backdrop, the market is closely watching Powell's speech and officials' interest rate expectations (the so-called "dot plot") to determine whether the Fed will take a more cautious stance on easing policies.

"My gut tells me there will be a 25 basis point cut this week," said Jack McIntyre, a bond portfolio manager at Brandywine Global Investment Management. "The key is whether the Fed's statement will emphasize that the labor market is deteriorating more than inflationary pressures."

McIntyre himself has been increasing his bond holdings recently, particularly adding to 30-year Treasuries. He believes that if there are more signs of a weak job market, investors may think that the timing for the Fed to initiate easing policies has already passed.

From the perspective of the overall financial market, most participants tend to believe that concerns about the job market will dominate Wednesday's meeting, and the Fed will convey a dovish tone.

In the bond market, the benchmark 10-year U.S. Treasury yield has fallen to near its lowest level since April; in the stock market, the S&P 500 index is approaching historical highs, while the tech-heavy Nasdaq 100 index recently recorded its longest consecutive rising streak in over a year before hitting a historical high last Friday; in the currency market, the dollar still struggles to rebound from its worst first-half decline since 1973, partly due to market expectations of significant rate cuts from the Fed putting pressure on it.

However, some stock traders are hedging against potential volatility shocks, partly because the expected outcome of a "25 basis point cut" has already been fully reflected in current stock prices. Options traders are betting that the S&P 500 index may experience about a 1% two-way volatility on Wednesday, which would be the largest single-day volatility for the index in nearly three weeks For Gareth Ryan, Managing Director of IUR Capital, the degree of easing reflected in the Federal Reserve's dot plot is crucial. He stated that if the dot plot confirms that the Federal Reserve will cut interest rates again before the end of the year and in the first quarter of 2026, the stock market is unlikely to react significantly; "but if the dot plot is vague about the rate cut plans for the first quarter of next year, the market may experience greater volatility."

Bloomberg macro strategist Michael Ball noted, "Given that inflation is showing stickiness but not accelerating, employment data is weakening while consumer spending remains stable, traders are increasingly weighing the possibility of the Federal Reserve taking a more aggressive easing path and how this path will support further increases in U.S. Treasury yields."

JP Morgan's trading department also issued a similar warning for the stock market, stating that this Federal Reserve meeting "could evolve into a 'buy the rumor, sell the news' scenario, leading investors to take profits."

Of course, investors are also aware of the pressures the Federal Reserve is currently facing: Trump has repeatedly criticized Powell for being too slow to act on interest rate cuts. Additionally, Trump's economic advisor Stephen Moore is expected to receive timely approval for his appointment to the Federal Reserve Board, allowing him to participate in this week's policy decision vote.

In July of this year, when the Federal Reserve kept interest rates unchanged, two voting members dissented, advocating for a rate cut. Vineer Bhansali, founder of asset management firm LongTail Alpha, stated that investors may look for clues in the voting composition of this meeting.

Bhansali pointed out that if the Federal Reserve cuts rates by 25 basis points and no members vote against it due to advocating for a larger cut (or only the already appointed Moore votes against it), this outcome would be seen as a hawkish signal.

"The current market has effectively positioned the Federal Reserve as a central bank 'heavily influenced by political factors and potentially overly accommodative,'" he said, "and that is the hidden risk."