Tonight, the most "divided" Federal Reserve interest rate decision in history is here!

The most anticipated Federal Reserve interest rate decision of the year is here. Although the market generally expects a 25 basis point rate cut, the backdrop of weak employment, inflation still above target, and increasing political pressure may lead to a "four-way split" in the Federal Open Market Committee (FOMC) voting. The subtle changes in the FOMC statement, the dot plot, and Powell's views on the labor market are all points of interest.

At 2:00 AM Beijing time, the Federal Reserve FOMC will announce the interest rate decision and economic projections summary, followed by a monetary policy press conference by Fed Chair Powell half an hour later. The market widely expects the Fed to cut rates by 25 basis points to a range of 4.00%-4.25%. According to a Reuters survey of 107 analysts, 105 expect a 25 basis point cut, while only 2 anticipate a 50 basis point cut, marking the first rate cut since December last year.

Previous articles from Jianwen predicted that the FOMC meeting would see a "four-way battle", which could lead to unprecedented voting divergences. In addition to officials advocating for "holding steady," the "super doves" represented by Miran, Waller, and Bowman may vote in favor of a 50 basis point cut, while Cook, embroiled in a resignation controversy, may unexpectedly vote for a 25 basis point hike to counter the White House.

It is also noteworthy whether this marks the beginning of a new round of easing cycles and whether the Fed will signal a series of rate cuts. Pay attention to whether the FOMC statement will change to "the risks to employment are rising." The "dot plot" in the quarterly economic projections will show officials' expectations for the number of rate cuts this year—whether it will maintain the June forecast of two cuts or be raised to three. Currently, the market bets that the Fed will continue to cut rates at the October and December meetings.

Political Pressure May Lead to Unprecedented Voting Divergence

The political interference of the Trump administration in the Federal Reserve has reached new heights, potentially triggering the most complex voting pattern in the institution's history.

Trump quickly appointed his economic advisor Miran as a Fed governor after Kugar's resignation, with whom he shares a similar stance on interest rate policy. Miran's term will only last until the end of January, after which Trump will arrange for a permanent replacement.

Meanwhile, Trump's efforts to dismiss Governor Cook on the grounds of alleged mortgage fraud have been blocked by an appellate court, allowing him to participate in this vote. This judicial intervention adds more uncertainty to the voting, and Cook may take an unexpected stance in response to political pressure.

Currently, a "four-way split" voting scenario is being discussed in the market, which may include:

• The large rate cut camp: The "super doves" represented by Miran, Waller, and Bowman may vote in favor of a 50 basis point cut
• Moderate rate cut camp: The centrist camp led by Chairman Powell may vote in favor of a 25 basis point rate cut as expected by the market.
• Maintain interest rates camp: Represented by officials like Goolsbee and Hammack, they may vote to keep interest rates unchanged.
• Unexpected rate hike "wild card": Cook may unexpectedly vote in favor of a 25 basis point rate hike to counter pressure from the White House.

Employment concerns drive rate cut expectations

Federal Reserve Chairman Powell's shift in stance at the Jackson Hole meeting laid the groundwork for this rate cut. The weak performance of the July employment report, coupled with a downward revision of 258,000 jobs over the past two months, and the continued weakness in August employment data, solidified expectations for a rate cut in September.

The preliminary benchmark revision from the Bureau of Labor Statistics shows that the labor market is weaker than previously thought, with a significant downward adjustment of 910,000 jobs during the Biden administration over the past year. The employment data over the past four months has performed poorly after considering revisions, with monthly job additions ranging from -13,000 to 79,000, three of which fell below the Federal Reserve's expected breakeven employment rate.

Federal Reserve Governor Waller has been advocating for a rate cut based on the weak labor market and stated that the pace of future rate cuts will depend on upcoming data. However, officials like Goolsbee remain cautious, hoping to confirm that the rise in service sector inflation is only a temporary phenomenon. The sharp deterioration in the labor market makes it easier for officials to reach consensus on a 25 basis point rate cut, but the debate over the pace of subsequent cuts is more complex.

Additionally, although the weak labor market drives rate cut expectations, inflation remains a challenge for policymakers. The inflation impact of tariff policies has become a focal point of debate among officials. Dovish officials believe that tariffs will lead to one-time price increases, which are temporary in nature. However, some officials still express concerns about more persistent price pressures.

Former Cleveland Fed President Loretta Mester stated, whether it is a single rate cut or multiple rate cuts, it will not alleviate the political pressure faced by the Federal Reserve, and she expects the initial rate cut this week to be limited to 25 basis points. She also made it clear that she does not anticipate a series of rate cuts immediately following this week's cut.

Mester emphasized that they must pay attention to data and evaluate it at each meeting. They will strive to act cautiously to ensure balance is maintained. If they want to reduce inflation, they need to maintain a certain degree of restrictiveness in policy. If the labor market shows substantial deterioration, they may shift to an easing policy, but they have not yet reached that point.

How will the FOMC statement and dot plot change?

Whether this rate cut marks the beginning of a new round of easing will be indicated by the FOMC statement and dot plot.

Analysts generally expect that the Federal Reserve will acknowledge the weakness in the labor market in the FOMC statement. Goldman Sachs expects the statement to acknowledge the weakness in the labor market, perhaps using wording similar to that of September 2024, but does not expect any changes to the policy guidance aimed at durability, nor will it imply that another rate cut will occur in October. However, Powell may slightly hint at this during the press conference. Even just hinting that the FOMC's rate cut is to support the labor market could be interpreted by investors as a signal for another rate cut in October, as past "preemptive rate cuts" have typically been consecutive.

Morgan Stanley expects the Federal Reserve to use similar wording to indicate that "job growth has slowed," while still acknowledging the low unemployment rate. Regarding inflation, the committee may again state that inflation "remains somewhat elevated" and elaborate in some way on the temporary upward pressure from tariffs.

Meanwhile, the update of the dot plot will be a key tool in shaping the market's expectations for rate cuts at the end of the year and in 2026. Goldman Sachs expects the median dot plot to show a total of two rate cuts in 2025 to 3.875%, albeit by a narrow margin of 10 to 9. While the Federal Reserve leadership is now likely to anticipate and forecast three consecutive rate cuts this year, they may not see the need to push the median participant to show three rate cuts.

Goldman Sachs expects the Federal Reserve to cut rates by 25 basis points consecutively in September, October, and December, followed by two more cuts in 2026, ultimately bringing the rate down to the range of 3%-3.25%. If the labor market deteriorates faster than expected, a 50 basis point cut could also occur in October or December.

For the longer-term outlook, the median dot plot is expected to show two more cuts in 2026 to 3.375%, one cut in 2027 to 3.125%, remaining unchanged in 2028, with the long-term or neutral rate maintained at 3%.

How will the market react?

JPMorgan expects a 47.5% probability of a dovish 25 basis point cut, which would push the S&P 500 index up by 0.5%-1%. However, the bank warns that the Federal Reserve meeting could become a "buy the rumor, sell the news" event, with a potential 3-5% pullback before the end of the month.

If a pullback occurs, key catalysts may include: PCE data on September 26, non-farm payroll data on October 3, and CPI data on October 15. JPMorgan is optimistic about a bull market scenario and recommends using any pullbacks to increase risk exposure, particularly in technology stocks, AI themes, and emerging markets in a weakening dollar environment.

The market reaction matrix provided by the bank shows:

In the case of a rate hike (1% probability), the S&P 500 index will drop by 2%-4%;

Keeping rates unchanged (4% probability) will lead to a decline of 1%-2%;

A hawkish 25 basis point cut (40% probability) may keep the index flat to down by 50 basis points;

A dovish 25 basis point cut (47% probability) will push the index up by 50 basis points to 1%;

While a 50 basis point cut (7.5% probability) has a wide range of outcomes, from down 1.5% to up 1.5%