Fed Rate Cut Priced In, But Can Powell Keep Stock Market Rally Intact?

The Federal Reserve is all set to announce its verdict at 2 p.m. ET on Wednesday following the conclusion of a two-day monetary policy meeting. With the odds of a 25 basis-point cut at over 90%, the uncertainty is around the change in the language of the policy statement and the central bank's rate outlook.

Opinions are divided over how the market would react even if the Fed delivers the rate cut that has been widely anticipated. The market has gone on to climb the wall of worry and rally strongly in the run-up to the Fed decision. The key stock market gauges -  the S & P 500, the Nasdaq Composite, the Nasdaq 100 and the Dow Jones Industrial Average - are all trading just below their peaks. 

Despite the tariff uncertainty and the inflation remaining stubbornly above the central bank target, the SPDR S & P 500 ETF (SPY), an exchange-traded fund (ETF) that tracks the S & P 500 Index, and the Invesco QQQ Trust (QQQ) have risen 13.29% and 16%, respectively, for the year.

On Stocktwits, retail sentiment toward the SPY and QQQ ETFs remained 'bullish,' and the message volume on both streams remained 'normal.'

Rate Move Expectations (for September meeting):

• CME FedWatch Tool: 96% odds of 25 bps cut
• Wall Street firms
  • Morgan Stanley: 25 bps cut
  • JPMorgan: 25 bps cut
• Prediction Markets
  • Polymarket: 93% chance of 25 bps cut
  • Kalshi: 94% odds of 25 bps cut

A Stocktwits poll that got nearly 44,000 responses showed that 57% of the platform users brace for a 25 bps cut and 27% root for a 50 bps+ cut, taking the cumulative percentage to 84%.

Where Are Stocks Headed?

JPMorgan's trading desk sees the possibility of S & P 500 moves between 4% drop and a gain of 1.5%, depending on the path the central bank chooses to tread. 

According to JPM's estimates shared on X, the following five scenarios could unfold:

• Fed hikes rates (1% probability) - S & P 500 drops by 2%-4%
• Fed pauses (4% probability) - S & P 500 drops by 1%-2%
• Fed cuts by 25 bps but stays hawkish (40% probability - S & P 500 could be flat or drop 0.5%
• Fed cuts by 25 bps and pivots to dovishness (47.5%) - S & P 500 rises 0.50%
• Fed cuts by 50 bps (7.5%) - S & P 500 gains 1.5%

Fed Under Pump

This time around, political pressure on the Fed is extreme, urging it to pivot to a cut. President Donald Trump and his administration have been very vocal in criticizing the central bank, led by Jerome Powell, for its stubborn hawkish stance. They have contended that the time is ripe for a deep cut to reinvigorate the ailing housing market and prop up the softening labor market.

Fed Governors Michelle Bowman and Christopher Waller, the two Federal Open Market (FOMC) members who chose to dissent against a pause decision in July, will likely persist with their call. Stephen Miran, who joined the Federal Reserve Board on Tuesday, replacing Adriana Kugler, who resigned in August, will likely clamor for a 50 bps cut, according to Morgan Stanley.

Fed Governor Lisa Cook, whom Trump ordered to be fired over alleged mortgage fraud she committed but has stayed on due to court intervention, may find herself without much voice amid the ongoing legal tussle with the president. 

SEP, Dot Plot

Apart from the Fed decision, the market is also likely to focus on the Summary of Economic Projections (SEP), which gives the Fed's updated outlook on key economic indicators such as GDP, PCE inflation and jobs.

The dot plot, a chart that summarizes the FOMC's outlook for the federal funds rate, could be of interest to traders. They may also strive to read between the lines of the post-meeting interview hosted by Powell at 2:30 p.m. ET.

Fund manager Louis Navellier said if Powell suggests a series of cuts are coming due to serious concerns about employment trends, there will likely be some downside volatility.“If he speaks in terms of getting closer to a neutral rate, we may see new highs,” he said.

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