Eliza Wong
Fed Set to Cut Rates After Nine-Month Pause: What Global Investors Must Know
The Federal Reserve is widely anticipated to cut interest rates for the first time in nine months at its September meeting, a move that carries significant implications for global markets—especially Chinese equities. With internal divisions running deep and political tensions simmering, this decision could mark a pivotal moment for monetary policy and international capital flows.
Key Takeaways
– The Fed is expected to cut rates by 25 basis points, with a 96% probability priced in by markets.
– Internal divisions within the Fed may lead to multiple dissents, reflecting heightened policy uncertainty.
– The updated dot plot will be critical in signaling whether the Fed expects two or three cuts in 2025.
– Historical data suggests preventive rate cuts often benefit risk assets, including A-shares and Hong Kong listings.
– Gold tends to perform strongly when the Fed cuts amid above-target inflation.
Market Expectations: 25 or 50 Basis Points?
According to the CME FedWatch Tool, market participants assign a 96% probability to a 25-basis-point cut, with only a 4% chance of a more aggressive 50-basis-point reduction. Recent softening in labor market data has increased pressure on the Fed to act, though persistent inflation concerns have tempered expectations for larger moves.
Data Driving the Decision
August’s weaker-than-expected jobs report signaled a potential slowdown, pushing Fed Chair Jerome Powell to prioritize labor market stability over inflation fears. Still, with consumer prices remaining above the 2% target and tariff-related uncertainties looming, the consensus leans toward a cautious 25-basis-point cut. Some traders, however, are hedging against a surprise 50-basis-point move, as seen in large options flows on Monday.
Internal Divisions: A Historically Split FOMC
The Federal Open Market Committee (FOMC) appears more divided than at any time in recent history. At July’s meeting, two officials dissented in favor of earlier action. This time, analysts from Deutsche Bank warn that dissents could come from both hawks and doves—a scenario not seen in decades.
Political Pressures and New Appointments
The recent confirmation of White House economic adviser Milan to the Fed Board adds another layer of complexity. Alongside existing Trump-appointed officials like Waller and Bowman, Milan may push for deeper cuts. Conversely, several officials who previously favored holding rates steady could dissent against any cut. This internal rift may test Chair Powell’s ability to maintain consensus.
Dot Plot and Forward Guidance
The updated dot plot will be closely scrutinized for clues about the Fed’s rate path through 2025 and beyond. In June, the median projection indicated two cuts this year, but the distribution showed nearly equal numbers of officials supporting either two cuts or no cut at all.
Interpreting the Signals
Bank of America and Goldman Sachs both project the dot plot will continue to signal two cuts in 2025. If the median shifts toward three cuts, markets will likely interpret the decision as dovish. Conversely, a hold at two cuts may be seen as hawkish, even if accompanied by a 25-basis-point reduction. Disagreement over the long-run neutral rate may also widen, reflecting deeper philosophical divisions.
Powell’s Press Conference: Navigating Uncertainty
Fed Chair Jerome Powell faces a challenging press conference, where he must explain the rate decision while addressing internal disagreements and external pressures. His comments on the labor market, inflation, and tariff impacts will be critical for market direction.
Communication Strategy
Powell has previously indicated that he views tariff-related price increases as likely transient—a stance that echoes the Fed’s initial response to inflation in 2021. If he emphasizes labor market concerns more strongly following the soft August jobs report, it could reinforce expectations for additional cuts. However, he must also acknowledge reservations among his colleagues about moving too quickly.
Market Implications: Equities, Gold, and Chinese Assets
Historical analysis suggests that the first rate cut in a cycle often precedes positive returns for U.S. equities over the following 12–24 months. Sector performance may vary based on whether the cut is preventive or recession-driven.
Gold and Defensive Assets
Gold has historically outperformed when the Fed cuts rates while inflation remains above target. Bank of America analysts note that in such “inflation-easing” environments, gold has never declined in the subsequent year, with average returns around 13%. They project gold could reach $4,000 per ounce by 2026.
China Market Exposure
According to Industrial Securities, preventive Fed rate cuts (like the expected 25-basis-point move) have historically supported A-shares and Hong Kong stocks through improved liquidity and risk sentiment. In preventive easing cycles, sectors like technology, consumer discretionary, and healthcare tend to lead. In recession-driven cuts, defensive sectors like utilities and energy outperform. Hong Kong markets are particularly sensitive to global liquidity conditions and typically rally on initial easing.
Strategic Takeaways for Global Investors
The Fed’s decision to cut rates after a nine-month pause signals a shift in priorities toward supporting growth amid cooling labor data. However, internal divisions and lingering inflation risks mean forward guidance will be as important as the cut itself. For China-focused investors, preventive easing tends to support equity inflows and sector rotation toward growth-sensitive names. Monitor the dot plot and Powell’s commentary for signals about the pace and extent of future cuts. Consider hedging strategies given elevated policy uncertainty and potential market volatility. Review allocations to gold, cyclical sectors, and dollar-sensitive assets as the easing cycle unfolds.
