The Federal Reserve (FED) is set to cut interest rates, with three major concerns influencing market trends.

The upcoming policy meeting of the Federal Reserve (FED) is described by renowned financial commentator Nick Timiraos as one of the most "peculiar" meetings in history. While the market almost unanimously expects the FED to announce its first interest rate cut in nine months, the three key concerns surrounding this meeting are the real factors that will influence the financial markets and asset pricing.

Interest rate cuts have become a certainty: the weak job market is a key driver

According to the CME's Fed Watch tool, the probability of a rate cut of 25 basis points to a range of 4.25%-4.50% is as high as 96%, which is almost a foregone conclusion. The core reason for the Fed's decision to start the rate-cutting cycle is:

· The U.S. job market continues to be weak: Over the three months ending in August, the average monthly increase in jobs was only about 29,000, the weakest three-month growth since 2010 (before the pandemic).

· The number of unemployed has surpassed the number of job vacancies.

· The number of first-time applicants for unemployment benefits has reached a nearly four-year high.

· The number of long-term unemployed (those unemployed for more than 26 weeks) has reached its highest point since November 2021.

The Chairman of the Federal Reserve (FED), Jerome Powell, clearly stated in his speech at the end of August: "The risks to employment are increasing," reflecting that concerns within the Federal Reserve (FED) about achieving the mission of "full employment" have now surpassed concerns about inflation.

Dilemma 1: The "Dot Plot" of Future Interest Rate Path – How many times will there be rate cuts this year?

As the 25 basis point rate cut has been highly priced in by the market, traders will no longer focus on "whether there will be a rate cut" but will instead concentrate on the Fed's policy forecasts for the remainder of 2025.

Market Expectations for Future Guidance

In the announcement on Wednesday, The Federal Reserve (FED) officials will release the latest economic forecasts, with the most attention on the "dot plot" – which reflects FOMC members' expectations for future interest rate levels.

· Expectations of continued interest rate cuts: Traders are betting that the Federal Reserve (FED) will begin a rate-cutting cycle, with the probability of further cuts in October and December exceeding 70%.

· Potential divergence signals: Goldman Sachs economists expect the "dot plot" to show two rate cuts instead of three, but "the divergence will be small."

Split Voting Between Hawks and Doves

The voting composition of this meeting is filled with uncertainty, and there is a clear division within the committee:

· Calls for a "substantial" rate cut: Newly appointed board member Stephen Milan is likely to cast a dissenting vote, advocating for a larger rate cut.

· Voices against interest rate cuts: Kansas City Federal Reserve Bank President Jeffrey Smith and St. Louis Federal Reserve Bank President Alberto Musalem may oppose interest rate cuts.

Suspense 2: Powell's "Tone" - How to Weigh Inflation Against Employment?

After the announcement of the interest rate decision, Powell's choice of words at the press conference is usually more important than the FOMC statement itself.

Is inflation "temporary" or "persistent"?

Federal Reserve officials generally believe that the inflation rise caused by the tariff policy of the Trump administration may only be temporary:

The president of the San Francisco Federal Reserve Bank, Daly, stated that "the price increases related to tariffs will be one-time."

Officials expect the effects of tariffs to be fully transmitted within the next two to three quarters.

· Against the backdrop of a weak labor market and unstable economy, the elasticity of price increases by companies has decreased.

Powell's speech must strike a balance between the dual mandates of full employment and price stability, conveying a tone that is "pragmatic and more dovish."

Suspense Three: Unprecedented Political Intervention - The Federal Reserve (FED) Independence Challenged

The uniqueness of this meeting stems in part from the political turmoil surrounding the core powers of The Federal Reserve (FED).

Rapid Ascendancy of the New Director

Trump's chief economic advisor Stephen Moore was confirmed by the Senate on Monday and sworn in on Tuesday morning, timely gaining voting rights for this FOMC meeting. This procedure, which usually takes months, was expedited and is seen as a manifestation of political pressure affecting the operation of the Fed.

Cook's Dismissal Controversy

Trump attempted to dismiss Federal Reserve Governor Lisa Cook at the end of August, setting a historical precedent. Although the appellate court temporarily blocked the dismissal order, Cook was still able to vote at this meeting, but her position remains undecided.

These changes highlight the enormous challenges facing the political independence of The Federal Reserve (FED), making any policy decisions carry a political shadow.

Summary: The market is waiting for signals, not decisions

A 25 basis point rate cut is already a consensus in the market. However, the true significance of this meeting lies in how it will set the tone for monetary policy in the last four months of 2025. As BNY strategists have pointed out, the Fed's "dual mandate objectives are in a state of 'tension'" and the increasing politicization complicates the situation further.