Bullish Bets Are at Risk as Markets Gear Up for a Series of Fed Cuts

The central question for markets this week is whether the Federal Reserve will temper expectations of a prolonged rate-cutting cycle that investors have already priced in well into next year.

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A 25-basis-point reduction is widely considered a lock when the Fed reveals its policy decision on Wednesday, though there’s still a slim chance of a deeper 50-basis-point move given the sharp slowdown in U.S. job growth. Beyond that, traders are betting on cuts extending through 2026 in an effort to cushion the economy from slipping into recession.

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Those assumptions have rippled across financial markets: Treasury yields are sitting at multi-month lows, U.S. equities continue to climb to record highs, and the dollar has been under pressure.

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But the risk to this bullish positioning is that Fed Chair Jerome Powell and his colleagues might signal that investors are too aggressive in pricing in rate reductions while inflation remains sticky and tariffs continue to feed into consumer prices.

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That backdrop makes Powell’s press conference and the updated “dot plot” of interest-rate projections particularly important. Markets are eager to see whether policymakers intend to tread cautiously on easing despite growing economic headwinds.

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“I think we’ll see 25,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management, referring to a quarter-point cut. “The real question is whether the Fed’s statement shifts emphasis toward the weakening labor market rather than lingering inflation.”

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McIntyre has been increasing exposure to longer-dated Treasuries, adding 30-year bonds in anticipation that continued signs of labor-market weakness could eventually convince investors the Fed was late to respond.

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Broadly, traders are positioning for the Fed to adopt a dovish tone, placing greater weight on slowing employment. Benchmark 10-year Treasury yields are hovering at their lowest since April, the S&P 500 is pressing against fresh highs, and the Nasdaq 100 notched its longest winning streak in over a year before setting another record last Friday. In currency markets, the dollar is still struggling to recover from its steepest first-half decline since 1973, weighed down by the prospect of aggressive Fed easing.

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Even so, some equity traders are bracing for turbulence around the announcement. Because a quarter-point cut is already priced in, volatility hedges are being put in place. Options markets are implying the S&P 500 could swing about 1% in either direction on Wednesday potentially its largest move in three weeks.

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For Gareth Ryan, managing director at IUR Capital, the Fed’s rate projections will be the key driver of market reaction. “If the dot plot confirms another cut later this year and one in early 2026, equities likely won’t see a dramatic response,” Ryan said. “But if the outlook for first-quarter cuts is less clear, we could see a sharper move.”

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Strategists at JPMorgan Chase & Co. have flagged a similar risk, warning that the Fed’s meeting could evolve into a classic “sell the news” event if investors use the occasion to take profits after the market’s strong run.

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Adding to the intrigue is the political backdrop. President Donald Trump has stepped up criticism of Powell, accusing him of being too slow to lower borrowing costs. Meanwhile, Trump’s economic adviser Stephen Miran is on track to potentially be confirmed as a Fed governor in time to participate in this week’s meeting.

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Back in July, when the Fed opted to keep rates unchanged, two officials dissented in favor of a cut. Market participants are watching closely to see whether the makeup of Wednesday’s vote sends a stronger signal. Vineer Bhansali, founder of LongTail Alpha, said if the Fed delivers only a quarter-point cut with little or no dissent for a larger reduction aside from perhaps Miran if appointed that would come across as a hawkish outcome.

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“The market is increasingly pricing in a Fed that’s leaning political and will ultimately overdo easing,” Bhansali said. “That’s the real danger investors need to watch.”

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