25 basis points is "set in stone," while 50 basis points is "very difficult." For the Federal Reserve, the market "wants more."

This week's FOMC interest rate decision has the market convinced that the Federal Reserve will cut rates by at least 25 basis points, but this is no longer sufficient to meet aggressive expectations, as investors have priced in a series of rate cuts extending to 2026.

Currently, the financial market generally leans towards the view that concerns about the employment situation will dominate this week's rate decision, and the Federal Reserve will convey a dovish tone. The market has absorbed expectations that the Federal Reserve will continue to cut rates before 2026 to avoid an economic recession, and this optimism has driven U.S. Treasury yields down to several-month lows, while U.S. stocks continue to hit new highs.

In the bond market, the benchmark 10-year U.S. Treasury yield is close to its lowest level since April, the S&P 500 index is nearing historical highs, and the Nasdaq 100 index has just recorded its longest consecutive rise in over a year.

However, due to inflation levels still being above target and the impact of tariffs on prices still unfolding, analysts believe that Federal Reserve Chairman Jerome Powell and other officials may signal that investors are being too aggressive, potentially triggering a repricing of asset prices. Powell's speech and the Federal Reserve officials' interest rate forecast "dot plot" are the focal points of this decision.

25 Basis Points Almost Certain, 50 Basis Points a Low Probability

The market's expectation for a 25 basis point rate cut by the Federal Reserve this Wednesday is nearly 100% certain. Jack McIntyre, a bond portfolio manager at Brandywine Global Investment Management, stated, "My gut tells me it's 25 basis points. The question is whether the Federal Reserve will emphasize employment more than inflation in the statement."

Media analysis points out that although a 25 basis point cut has become consensus, there remains a low probability of a 50 basis point cut amid signs of a rapid slowdown in U.S. job growth. This judgment will largely depend on how the Federal Reserve weighs the contradiction between a weak labor market and resilient inflation.

Investor optimism about the Federal Reserve initiating a rate-cutting cycle has pushed asset prices to high levels. In the bond market, the benchmark 10-year U.S. Treasury yield hovers near its lowest point since April. In the stock market, the S&P 500 index is approaching historical highs, while the tech-heavy Nasdaq 100 index set a new record last Friday and recorded its longest consecutive rise in over a year.

Meanwhile, the U.S. dollar has struggled to rebound after experiencing its largest first-half decline since 1973, partly due to market expectations of deep rate cuts by the Federal Reserve.

However, some stock traders are hedging against potential volatility shocks, partly because the market has fully priced in the expectation of a 25 basis point cut. Options traders are betting that the S&P 500 index will fluctuate about 1% in either direction on Wednesday, which would be the largest single-day swing for the index in about three weeks.

Inflation and Tariffs Remain Concerns: Focus on Dot Plot and "Dissenting Votes"

The market's bets on continued rate cuts face a core risk: Federal Reserve officials may believe that investors are overreacting.

Currently, the inflation rate remains stubbornly above the Federal Reserve's target, and the subsequent impact of tariffs on prices has yet to fully materialize. These factors may prompt the Federal Reserve to issue warnings, suggesting that the market's easing expectations exceed the central bank's plans According to Bloomberg strategist Michael Ball's analysis, "Although inflation shows stickiness, it has not re-accelerated, labor data is softening, and consumer spending remains stable. Traders are increasingly weighing the possibility of the Federal Reserve taking a more aggressive easing path and the support this would provide for further increases in U.S. Treasury yields." JP Morgan's trading department also warned that this meeting could evolve into a "sell the fact" event, leading investors to take profits and withdraw funds.

For investors, the wording of this week's meeting statement, the dot plot, and the composition of the voting results will be key to assessing the future direction of Federal Reserve policy.

Gareth Ryan, Managing Director of IUR Capital, believes that the degree of easing reflected in the dot plot is crucial. He stated that if the dot plot confirms further rate cuts before the end of the year and in the first quarter of 2026, he expects little reaction from the stock market. "However, if the dot plot's statement on rate cuts in the first quarter of next year is not clear enough, it opens the door for greater market volatility."

Finally, political factors also add complexity to this meeting. Trump's economic advisor Stephen Miran may be confirmed as a Federal Reserve governor and participate in decision-making before this week's meeting.

Vineer Bhansali, founder of asset management firm LongTail Alpha, pointed out that investors should pay attention to the voting situation in this meeting. He stated that if the Federal Reserve cuts rates by 25 basis points and no decision-makers vote for a larger cut (or possibly only Miran does), the market will interpret this as a hawkish signal.

"The market is effectively betting on a rather politicized, overly accommodative Federal Reserve," he said, "and this notion itself is a danger."