Fed Preview: A Rate Cut Is Baked In, Will Trump Get The 'Big Cut' He Wants

The Federal Reserve is widely anticipated to implement a 25 basis point rate cut on Wednesday, marking the first such reduction since December 2024, despite stock market indexes currently trading at all-time highs. While a 50 basis point cut is less probable, market participants will closely monitor the FOMC's post-decision guidance, particularly the Dot Plot projections for future rate paths, given strong August retail sales and expert concerns that a 25 bps cut might already be priced in, potentially leading to 'sell-the-news' volatility.

Analysis

The Federal Reserve is poised to implement a 25 basis point rate cut, an action that markets have almost fully priced in, with the CME FedWatch Tool indicating a 96.1% probability. This expected cut, the first since December 2024, occurs while major equity indices like the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) are trading at or near all-time highs, prompting analyst concerns that the move is already "baked into" the recent rally. The decision is set against a mixed economic backdrop; while inflation and unemployment show "signs of worry," August retail sales data was unexpectedly strong, showing 0.6% growth versus a 0.3% consensus estimate. Consequently, investor focus is shifting from the rate cut itself to the Federal Reserve's forward guidance. Analysts have highlighted the critical importance of the post-meeting Dot Plot, which will reveal members' projections for future rates, and Chair Powell's press conference. There is a palpable risk of a "sell-the-news" event and significant volatility, particularly if the guidance is perceived as cautious or if the 25 basis point cut is deemed insufficient to sustain market momentum.

Key Decisions for Investors

• Investors should prepare for heightened market volatility following the announcement, as a widely expected cut could trigger a 'sell-the-news' reaction in a market already at all-time highs.
• Pay close attention to the Fed's updated Dot Plot and Chair Powell's forward-looking statements, as this guidance on the future path of rates will likely be a more significant market driver than the rate decision itself.
• Given that strong August retail sales contrast with other worrying economic signals, analyze the Fed's justification for the cut to understand whether their primary concern is unemployment or inflation, which will inform future policy.
• Consider reviewing exposure to broad market indices like SPY and QQQ, as a cautious tone from the Fed or a simple confirmation of the priced-in cut could be a catalyst for near-term profit-taking or a market pullback.