On September 18th, the Federal Reserve is almost certain to cut interest rates for the first time in over four years, but whether policymakers will choose a 50-basis point cut or a smaller reduction remains unknown. Currently, interest rate futures markets reflect a greater than 60% probability of a 50-basis point cut. Fed Chair Jerome Powell has said that bringing inflation closer to the Fed's 2% target is their top priority. However, a 25-basis point cut would be more consistent with the Fed's past practice of initiating easing cycles outside of a crisis. Stock option pricing suggests the S&P 500 index could fluctuate around 1.1% on Wednesday. Recent gains in U.S. stocks make it difficult for the market to handle disappointment if the Fed's rate cut is smaller.

Diane Swonk, chief economist at KPMG, wrote that while a 50-basis point cut "would undoubtedly be discussed," Powell "is unlikely to get enough votes." Tara Hariharan, managing director at global macro hedge fund NWI Management, said, "With the U.S. stock market near all-time highs and potentially already reflecting an aggressive easing cycle from the Fed, the risk-reward outlook for further gains looks unattractive."

Weller, an analyst at StoneX, said a 25-basis point cut could lead to a knee-jerk rise in the dollar, possibly pushing USD/JPY back above the key 142.00 level; a 50-basis point cut could drive the pair toward the psychological 140 level. Glen Capelo, managing director of fixed income at Mischler Financial Group, said a 25-basis point Fed cut could likely lead to a sell-off in U.S. Treasuries, although much will depend on Powell's press conference.

Michael Rosen, managing partner and chief investment officer at Angeles Investments, believes the current bond market is pricing in an overly aggressive Fed rate cut path. The market expects the Fed to cut rates by 250 basis points next year, a magnitude only likely in a recession. He therefore believes that the decline in short-term U.S. Treasury yields will be less than the market expects, and long-term yields could even start to rise from now on. Saish Sandeep Sawant Dessai, an analyst at Angel One, said in a report, "The real risk is that the market is pricing in too much dovishness, which could lead to higher U.S. Treasury yields and the dollar, further pressuring gold prices." (Jin Shi)