Expectations for Rate Cuts Soar
The U.S. market's predictions about Federal Reserve monetary policy have significantly heated up recently. According to the latest data from the CME "FedWatch" tool, the market anticipates that the Federal Reserve may consecutively cut interest rates three times by the end of 2025 to counteract multiple pressures such as economic slowdown, weak employment, and cooling inflation.
Data shows that investors perceive a 96.3% probability of a 25 basis point rate cut at the October meeting of the Federal Reserve, with a 3.7% chance for a 50 basis point cut. Additionally, the market has fully priced in another rate cut in December, with an 85% probability for a 50 basis point reduction and a 14.6% probability for a 75 basis point cut, a leap from 0% the previous day.
These betting changes indicate that investor confidence in the direction of Federal Reserve's monetary policy is rapidly shifting towards a more accommodative stance.
Weak Economic Data Fuels Easing Sentiments
Recently, disappointing U.S. economic data has become the major driver behind the market's shift in expectations. The labor market continues to cool, manufacturing activity is slowing, and consumer spending growth is sluggish—altogether signaling a weakening economic momentum. Meanwhile, falling energy prices further ease inflation pressures, giving the Federal Reserve more room to cut rates.
Regional economic reports from the New York and Philadelphia Federal Reserves both point to significant slowing in services and manufacturing sectors in October, with businesses losing confidence in future economic prospects. Analysts believe these data reinforce the market's judgment of a policy shift, contributing to the continuous decline in U.S. Treasury yields.
Federal Reserve Shifts to "Preemptive Easing"
The change in market expectation is not unfounded. Recent speeches by several Federal Reserve officials reveal a trend towards a more dovish policy stance. At last week's meeting, Federal Reserve Chair Jerome Powell noted that the U.S. labor market is experiencing a structural slowdown, with employment growth noticeably lower than at the year's start and wage growth retreating. Powell stated that the Federal Reserve is "close to the ideal interest rate range" and will consider rate cuts to "ensure a soft landing for the economy."
Meanwhile, Philadelphia Federal Reserve President Anna Paulson publicly stated that the current monetary policy is "slightly tight," and if employment and consumption continue to weaken, further rate adjustments would be necessary to prevent the economy from slipping into deeper recession risks.
Financial Markets React Positively
Stoked by rising expectations of rate cuts, both bond and stock markets have shown clear reactions. The yield on 10-year U.S. Treasuries fell below 4%, hitting a five-month low, while spot gold prices climbed above $4,300 per ounce, setting a new record high.
In the stock market, the S&P 500 index continues its upward trend, with tech stocks and precious metal-related sectors leading the gains, indicating that investor sentiment has shifted from defensive to proactive pricing for an accommodative policy. Analysts point out that if the rate-cutting cycle begins as expected, it might drive short-term capital inflows into the stock market and emerging markets.
Risks and Uncertainty Remain
Despite the general optimism about rate cuts, some economists warn that the Federal Reserve's policy room is limited. If inflation rebounds in the future or fiscal spending increases, the easing cycle might be forced to halt.
Morgan Stanley analysts state: "The market may overestimate the Federal Reserve's willingness to cut rates. Although inflation is temporarily under control, core prices remain above target levels, and if economic data unexpectedly improves, the policy stance may tighten again."
Three Rate Cuts Could Define the Year
Considering the current market pricing and macro signals, most institutions believe that the Federal Reserve could cut rates at the policy meetings in October, December, and early next year, with a total reduction likely reaching 75 basis points or more.
Analysts generally believe that the Federal Reserve aims to balance the delicate relationship between inflation and growth while leaving room in policy for potential economic weakening. If economic data continues to be weak, the U.S. monetary policy easing cycle might start in full and become the main theme of the 2025 financial market.
