Fed Decision Preview: Political Heat, Cooling Jobs — 25 or 50 bps?

As the Federal Reserve prepares to announce its next move on September 17, 2025, markets are anticipating a potential rate cut, with the odds for a 25 basis point (bps) reduction sitting at near certainty. The latest data, including a softer August jobs report and slower wage growth, have reinforced expectations of easing. However, the landscape leading into this decision is far from typical. The political environment has heated up, with public figures aligned with the White House calling for deeper cuts. Donald Trump has added pressure on Chairman Jerome Powell, further fueling concerns about the Fed’s independence. As the central bank’s decision looms, the question remains: Will politics influence the pace of the cut, or will the data dictate the outcome?

What are the Best ASX stocks to invest in right now?

Check our buy/sell tips

Political Pressure: Can the Fed Maintain Independence?

The pressure on the Federal Reserve to enact significant cuts has been palpable. Notably, prominent macro investor Scott Bessent has called for rates to be reduced by 150–175 basis points, even suggesting a 50 bp cut for September. Such calls reflect a broader sentiment in some circles that the Fed should act more aggressively to support the economy.
However, this pressure is not without its critics. Many financial analysts, as well as economists, have raised concerns about the potential for political interference to undermine the Fed’s independence. Public campaigns to reshape the Fed could raise risk premiums and erode trust in the institution’s ability to make unbiased decisions. This is particularly crucial at a time when market volatility is sensitive to any perceived shifts in policy independence.

The Data: Does the Economy Really Need Rate Cuts?

Looking at the economic data, there are mixed signals. The August nonfarm payrolls came in significantly below expectations, with a mere 22,000 jobs added. This represents a sharp deceleration compared to earlier months, while the unemployment rate ticked up to 4.3%, indicating some cooling in the labour market. This could be seen as a sign that the economy is slowing, and it would justify a more cautious approach to tightening monetary policy.
On the wage front, average hourly earnings increased by 0.3% month-on-month in August and 3.7% year-on-year. Although these figures are still elevated, they are showing a downward trend, suggesting that wage pressures are easing. Such developments support the case for a rate cut, as slower wage growth typically signals lower inflationary pressures. While inflation remains a concern, recent data show that price increases are drifting closer to the Fed’s target. This provides some room for the Fed to ease without sparking inflationary concerns.

What the Bond Market Has Priced In

The bond market is a key indicator of investor expectations for the Federal Reserve’s next move. As of now, Fed funds futures are pricing in a near-certain 25 basis point (bps) rate cut, with approximately 90% of the market anticipating this outcome. This pricing reflects the current economic conditions, including weaker-than-expected jobs data and cooling wage growth, which suggest that the Fed may need to ease monetary policy to support continued growth. While a 25 bps cut seems to be the most likely outcome, there remains a small chance, roughly 10%, that the Fed could opt for a more aggressive 50 basis point reduction. This reflects a broader debate in the market: while many investors believe that the data support a more gradual 25 bps cut, some argue that a more significant reduction may be necessary to ensure the economy doesn’t lose momentum.
The odds in the futures market have shifted following the release of the August jobs report, with expectations for a 50 bps cut slightly increasing in the aftermath of the weaker-than-expected employment data. If the Fed does opt for a 50 bps cut, it could initially create volatility in the bond market, as investors may interpret the move as a sign that the Fed is reacting too aggressively. However, over time, if the 50 bps cut is seen as a proactive measure to prevent further economic slowdown, it could be viewed as a positive development for risk assets, including bonds.

The Decision Tree: What Could Happen?

Base Case — 25 bp Cut: A Gradual Approach

The most likely scenario is a 25 bp cut, aligning with the futures market and acknowledging the cooling labour market while avoiding the perception that the Fed is capitulating to political pressure. A 25 bp reduction would likely have a modest impact on the markets. Treasury yields on the short end could decline slightly, while risk assets, such as tech stocks and long-duration assets, would likely perform well. The US dollar could soften marginally as well, as lower interest rates reduce the attractiveness of holding USD-denominated assets.

Hawkish Surprise — Hold Rates Steady

Though this is considered a low-probability outcome, there remains a small chance that the Fed could choose to hold rates steady. This would be a bold move, signalling that the central bank sees the current economic slowdown as a temporary dip rather than a sustained trend. Such a decision could lead to a negative reaction in equity markets, particularly for growth stocks. A stronger US dollar might also result, as higher rates would continue to make dollar-denominated assets attractive.

Aggressive — 50 bp Cut

A 50 bp cut, while not the consensus choice, has been floated by some market participants like Bessent. This would be a more dramatic move and could initially be interpreted as a “policy panic.” However, if framed as an insurance measure to avoid a more severe downturn, it could provide relief to risk assets. While this move would likely lead to significant market volatility in the short term, it might create opportunities in equities and high-risk assets.

Investor Outlook: What Does This Mean for the Markets?

Rates and FX: The Likely Impact of a 25 bp Cut

With a 25 bp cut priced in, investors should be prepared for a gradual bull-steepening in the yield curve. The 2-year Treasury yields, which are more sensitive to changes in short-term interest rates, are expected to decline, while the broader bond market might also benefit from the move. The US dollar could weaken marginally, which would favour exporters and companies with significant international exposure.

Equities: A Positive Outcome for Growth Stocks

A 25 bp cut would likely provide a tailwind for growth stocks, particularly those in the technology sector. These stocks tend to benefit from lower rates, as their future earnings are discounted at a lower rate. A 50 bp cut would add more volatility to the market but could provide a boost to stocks if interpreted as a measure to head off further economic weakening. Conversely, a hold on rates could result in a sell-off in high-beta equities.

Credit and Bonds: A Cautious Approach

For credit and bonds, a 25 bp rate cut would likely result in a modest rally, particularly in longer-duration assets. Investors should consider adding duration on dips but maintaining a quality bias in case the market interprets the move as a sign of deeper policy concerns. If the Fed opts for a 50 bp cut, there may be initial anxiety in the credit markets, particularly if the move is seen as an indication that the Fed is overreacting.

Australian Markets: A Weakening AUD Could Benefit Exporters

For Australian investors, the impact of a Fed rate cut would typically result in a weaker US dollar, which could lead to a stronger Australian dollar (AUD). This could be beneficial for exporters and companies in the resources sector, as their products become more competitively priced on global markets.

Conclusion: What Investors Should Watch

As we head into the September 17 decision, the market is mostly pricing in a 25 bp cut, and we expect that to be the base case. However, investors should keep a close eye on the Fed’s guidance in its statement and any language that could suggest further cuts in November or December. The political pressure on Jerome Powell could influence the tone of the statement, but it is likely that the data will drive the final decision. Investors should be prepared for volatility, regardless of whether the Fed opts for a 25 or 50 bp cut. The upcoming meeting is crucial not only for short-term market moves but for setting the tone for the Fed’s strategy in the final months of 2025.

FAQs

• What is the likelihood of the Fed cutting rates by 50 basis points in September 2025?

  The probability of a 50 basis point rate cut is relatively low, with the market currently pricing in a 90% chance of a 25 basis point cut. However, there is a small chance (around 10%) that the Federal Reserve could opt for a more aggressive 50 basis point reduction, depending on the economic data and political pressures at the time.

• How does the Fed’s rate decision affect the stock market?

  The Fed’s rate decision has a direct impact on the stock market, particularly in sectors like technology and growth stocks. A 25 basis point cut is likely to provide a boost to these sectors, as lower rates make future earnings more attractive. Conversely, a 50 basis point cut could trigger more volatility, offering both upside opportunities and risks for investors.

• What is the political pressure on Jerome Powell regarding the Fed rate decision?

  Prominent figures, including macro investor Scott Bessent and President Donald Trump, have publicly called for more aggressive rate cuts. Trump, in particular, has escalated rhetoric against Chairman Jerome Powell, putting the Fed’s independence under scrutiny. While the Fed is expected to act based on data, the growing political pressure has raised concerns about the potential influence of political factors on the decision-making process.

• How do cooling jobs data impact the Fed’s decision on rate cuts?

  The cooling labour market, evidenced by the weaker-than-expected August jobs report and a rise in the unemployment rate to 4.3%, provides the Fed with more room to ease policy. Slower job growth, along with moderate wage increases, suggests that the economy may be slowing, supporting the case for a rate cut to stimulate growth without sparking inflationary pressures.

• How will the Fed’s decision impact bond markets and yields?

  A 25 basis point rate cut is likely to result in a modest bull-steepening of the yield curve, with shorter-term Treasury yields falling. Investors will likely see bond prices rise, particularly for long-duration bonds. If the Fed opts for a 50 basis point cut, bond markets may experience initial volatility, though risk assets may benefit as the market interprets the cut as a measure to safeguard the economy.