Introduction to the Federal Reserve’s Decision
The Federal Reserve is set to meet next week, and investors are eagerly waiting to see how the central bank will address the flagging U.S. labor market. Despite inflation data coming in slightly hotter than expected, market players still expect the Fed to cut interest rates for the first time in nine months to support employment.
Expected Rate Cut
As of Thursday, Fed fund futures indicated a 90% chance that the Fed would lower rates by 25 basis points in next Wednesday’s policy decision. This is based on data from LSEG, which shows that 60% of the 55 rate reductions in the fed funds rate since 1990 have been 25 basis point cuts. However, there is still a 10% chance of a larger-than-standard 50 bp cut.
Historical Context of Rate Cuts
According to Nicholas Colas, co-founder of DataTrek Research, of the 18 times the Fed has cut by 50 bps, all but one occurred during or just after recessions. The one exception was in September 2024, which was the first of three cuts totaling 100 basis points last year, resulting in the current rate of 4.25%-4.5%. Colas notes that a 50 basis point cut would signal that the Fed is worried about the near future of the U.S. economy.
Market Expectations
Fed fund futures are currently baking in expectations of 73 basis points of easing by December, or nearly three standard cuts. The central bank will give its latest summary of economic projections on Wednesday, updating its view of the economy and monetary policy. Investors will be looking for the Fed to communicate its concerns about the labor market and to signal that it is primarily focused on supporting employment.
The Impact of Trade and Fiscal Policy
The Fed has held steady on rates so far in 2025, with Chair Jerome Powell and other Fed officials expressing wariness about Trump’s import tariffs possibly leading to higher inflation. However, recent stability in trade and fiscal policy has led investors to focus on the Fed’s actions. Chris Fasciano, chief market strategist at Commonwealth Financial Network, notes that "the Fed has moved back onto the front burner for investors going forward" and that the labor market is now the dominant story.
The Role of Technology Shares
Wall Street will also be focusing on technology shares and the AI trade, particularly after Oracle’s 36% surge in shares on Wednesday. The enterprise software maker’s stunning stock gains were fueled by a wave of multi-billion-dollar cloud deals, showing the scramble for computing power in the AI race. Yung-Yu Ma, chief investment strategist at PNC Financial Services Group, notes that the Oracle stock surge "illustrates about the economy and about technology and about AI that these developments are taking place very fast."
Conclusion
In conclusion, the Federal Reserve’s meeting next week is highly anticipated, with investors expecting a rate cut to support the flagging U.S. labor market. While there are uncertainties about the size of the cut and the Fed’s expectations for future rate decreases, one thing is clear: the Fed’s decision will have a significant impact on the market and the economy. As investors wait with bated breath, they will be looking for the Fed to communicate its concerns about the labor market and to signal that it is committed to supporting employment.
