Despite most Wall Street observers believing the Federal Reserve faces a high threshold for significant rate cuts, traders still consider it possible that the Fed could lower its key interest rate by 0.5 percentage points (50 basis points) next week.

Based on the most likely scenario reflected in current market pricing, the Federal Reserve will cut the overnight lending rate by 25 basis points (0.25 percentage points) on September 17. According to the CME Group's "Fed Watch Tool" (which calculates the probability of Fed policy actions through 30-day federal funds futures contract data), market expectations for a 25 basis point rate cut stood at approximately 88% on Monday afternoon.

However, this also means there remains a small possibility that the Federal Open Market Committee could implement a 50 basis point rate cut—an action the committee took at its September 2024 meeting. Current market expectations for a 50 basis point rate cut stand at 12%, while traders have ruled out the possibility of the committee keeping rates unchanged.

Market expectations for Fed rate cuts intensified after Friday's employment report showed U.S. nonfarm payrolls added only 22,000 jobs in August, with the unemployment rate rising to 4.3% (a four-year high).

Citigroup economist Andrew Hollenhorst stated in a report following the employment data release: "August's weak employment data will help build consensus within the committee—not only that rate cuts should resume this month, but that further cuts in coming months may also be appropriate."

Although Hollenhorst believes some Federal Open Market Committee members may support larger rate cuts, "we think a majority of committee members would not support a 50 basis point cut." Members who might support significant rate cuts include Fed Governors Michelle Bowman, Christopher Waller, and Stephen Milan if the Senate confirms his nomination before the Fed meeting.

Citi's view differs slightly from mainstream market expectations, believing that the Federal Open Market Committee will implement rate cuts at each of the next five meetings as Fed officials examine current inflation trends and focus more on labor market weakness. The core basis for this assessment is that while Fed officials will still be concerned about inflation, they will place greater emphasis on the employment market.

Nomura Securities economist David Seif stated: "The August employment report provides ample justification for the Fed to launch a series of 'preventive rate cuts' at its upcoming meeting. Given that inflation risks remain elevated, we expect officials won't take more aggressive rate cut measures unless they see clear signs of intensifying labor market pressure or significant tightening in market financial conditions."

Current market expectations are: the Fed will implement rate cuts next week, pause cuts at the October meeting, and cut again at the December meeting.

Since current Fed Chairman Jerome Powell began holding press conferences after every meeting in 2019, the Federal Reserve has rarely skipped meetings without taking action during rate adjustment cycles.

However, Apollo Global Management economist Torsten Slok pointed out that policymakers currently face a dilemma: inflation remains above target levels while the employment market shows weakness, creating a conflict between the Fed's dual mandate of "price stability" and "full employment."

Upcoming Consumer Price Index (CPI)

Fed officials will receive Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data later this week, representing the last batch of important data before the September meeting. According to economists surveyed by Dow Jones, overall inflation is expected to rise to 2.9%, while core inflation is projected to remain at 3.1%. If CPI comes in higher than expected, it would likely confirm a 25 basis point rate cut magnitude.

Slok stated on Monday: "The worst-case scenario is if inflation unexpectedly moves higher, things will become very tricky, and next week we might start discussing a question: when the Fed's dual mandate requires rate cuts on one hand and rate hikes on the other, how should policy be formulated?"

Slok said that even if inflation remains sticky, he still expects the Fed's policy bias to remain accommodative.

He stated: "I think Fed officials will talk more about inflation expectations, focus less on current inflation levels, and instead concentrate on future inflation trends."