The Federal Reserve is about to cut interest rates, traders are betting on a 25 basis point pricing, and stock market volatility is expected to be below normal

According to the Zhitong Finance APP, Wall Street traders are almost certain that the Federal Reserve will announce a 25 basis point rate cut later today. They are also confident that Fed Chairman Jerome Powell will signal further rate cuts to support the weak labor market. However, at the same time, there remains a significant possibility of substantial market volatility.

This expectation has driven the U.S. stock market to reach historical highs in recent weeks, leading options trading experts to bet that the market's reaction to the Fed's policy decision will be smoother than usual. Data compiled by Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, indicates that the S&P 500 index is expected to fluctuate by about 0.72% on Wednesday, slightly lower than the average actual volatility of 0.77% during the past eight Fed meetings.

However, the potential for breakthrough volatility in the market remains high. Fed officials will update their expectations for interest rate trends and economic outlook for the coming year. Currently, traders have almost priced in "two more rate cuts by the end of the year (25 basis points each)" and expect a cumulative rate cut of about 150 basis points over the next 12 months. If the "dot plot" released by the Fed shows a more hawkish overall stance from policymakers, it could trigger a wave of selling.

Powell will also take questions from the media, and if the Fed chairman makes hawkish comments, especially regarding the ongoing risks of accelerating inflation, it could also suppress the prices of risk assets.

Justin Wiggins, managing director of equity trading at Stifel Nicolaus, stated, "Given the continued rise in the stock market, the current situation may evolve into a 'buy on good news, sell on the news' scenario. However, traders are still worried about missing further upside opportunities (i.e., there is 'fear of missing out'), so they may take advantage of any pullback to increase their positions."

Since early April, the market capitalization of the S&P 500 index has increased by $14 trillion, closing just 0.1% away from its historical high on Tuesday. Data from Carson Investment Research shows that after U.S. President Donald Trump announced tariff plans in April, the index nearly fell into a bear market, but then surged about 30% over the next five months, a rise that has only occurred four times since the 1950s.

All previous factors that suppressed risk appetite, whether it was the rise in long-term U.S. Treasury yields, the unemployment rate hitting its highest point since 2021, or lackluster performance from some large consumer companies, ultimately turned out to be "temporary," as dip buyers continued to inject funds into U.S. stocks.

Bullish investors have "historical data backing them up." Craig Cohen, managing director of global investment opportunities at JPMorgan Private Bank, pointed out that historically, the Fed has cut rates 16 times when the S&P 500 index was within 1% of its historical high, and his data shows that the index has risen every time one year later, with an average return of nearly 15%.

Confidence in the continuation of this trend has driven the Chicago Board Options Exchange Volatility Index (VIX, also known as the "fear index") down to near lows since 2025. If the Fed's interest rate signals do not align with market expectations, traders may face the risk of "disappointment." Max Wassertman, Senior Portfolio Manager at Miramar Capital, stated: "If Powell adopts a hawkish stance and expresses concerns about inflation, it will trigger market panic; however, as long as he maintains a dovish position and hints at further rate cuts soon, the stock market will respond positively. If the Federal Reserve significantly cuts rates, it will be beneficial for the stock market as long as the economy remains strong."

Anna Wong, Chief U.S. Economist at Bloomberg Intelligence, believes that the Federal Reserve will implement rate cuts, but she noted: "Many Federal Open Market Committee (FOMC) officials do not wish to cut rates at this meeting, and we expect at least some open opposition."

Economists at Barclays Bank, led by Mark Janoni, estimate that the Federal Reserve will cut rates this week due to increased downside risks in the labor market, predicting a total of three rate cuts this year, with the dot plot median expected to drop to 3.6% by the end of 2025.

Andrew Taylor, head of global market intelligence at JP Morgan, believes that the market's reaction to the Federal Reserve's decision may align with the trends implied by derivative market positions, indicating overall stability. His research shows that the most likely outcome is a 25 basis point rate cut by the Federal Reserve, and as long as Powell leans dovish and signals "gradual rate cuts," the S&P 500 index is expected to rise by 0.5% to 1%.

In a report sent to clients on Monday, Taylor stated that if Federal Reserve officials announce a 25 basis point rate cut, but Powell is reluctant to push his colleagues for further cuts due to inflation concerns, JP Morgan's trading department expects the S&P 500 index to close flat or decline by up to 0.5% on that day.

JP Morgan also noted a very low probability (the institution estimates the likelihood at only 7.5%) scenario: if the Federal Reserve believes the weakness in the labor market necessitates a 50 basis point rate cut, the calm in the market will be disrupted. On one hand, due to the positive impact of lower borrowing costs on the economy, the stock market could rise by up to 1.5%; on the other hand, if investors interpret this unexpected rate cut as a signal that "the economic situation is worse than expected," the stock market could also decline by 1.5%