JPMorgan´s Feroli anticipates a 25bps rate cut, with 2-3 potential dissenters favoring at least a 50bps reduction. He expects three consecutive cuts between October 2025 and January 2026. According to his projections, the DOTS will indicate one additional cut in FY25, two cuts in FY26, and one cut in FY27, ultimately bringing the rate to 3.00%. During the Press Conference, Powell is likely to emphasize downside risks to employment, as tariff-driven inflation is expected to be temporary; however, Feroli does not foresee firm forward guidance. The macroeconomic landscape has shifted since the easing measures of 2024, when Core PCE declined from 2.9% to 2.6%. Currently, inflation is on the rise, with Core PCE increasing from 2.6% to 2.9%. Back in 2024, the Fed implemented a 50bps cut on September 18, followed by 25bps cuts on November 7 and December 18. Between September 17 and January 14, the 10-year yield climbed by 114.7bps, with January 14 marking the YTD high for the 10-year yield.
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Trading Scenarios
[1.0%] FED HIKES – SPX falls 2%–4%
This is a tail risk with a probability closer to zero than 1%. Core CPI MoM has risen for three consecutive months, which may give the Fed pause, but the CPI print wasn't hot enough to make this scenario a credible threat. For context, the 3-month average for Core CPI MoM is 0.30% or 3.64% annualized—elevated, but insufficient to warrant a hike, especially given potential dovish inflection from tariff policy.
[4.0%] FED REMAINS PAUSED – SPX falls 1%–2%
Another tail risk, this outcome would likely require both a stronger NFP print and a hotter CPI print, neither of which materialized. Powell’s comments at Jackson Hole suggest this scenario could do more harm than good.
[40%] HAWKISH 25BP CUT – SPX flat to down 50bp
The key debate centers on whether the Fed’s statement and press conference skew hawkish or dovish. We believe inflation is increasing at a decreasing rate, with YoY levels in the 2%–3% range. This supports a rate cut and a return to a data-driven approach. However, Fedspeak indicates the labor market remains a primary concern. Data pointing to higher hiring (e.g., Small Biz survey, Indeed listings) could lead to a more hawkish tone from Powell, potentially limiting stock market gains.
[47.5%] DOVISH 25BP CUT – SPX gains 50bp–1%
Under this scenario, the Fed views inflation as transitory and the labor market as far from exerting inflationary pressure. This provides room for gradual rate cuts as long as inflation remains contained and NFP remains weak. A dovish cut could drive modest market gains.
[7.5%] 50BP CUT – SPX range: -1.5% to +1.5%
This tail risk carries a wide range of outcomes. A negative reaction could stem from market concerns that the Fed is overly worried about the labor market, sparking uncertainty. Conversely, a positive reaction could reflect the Fed’s proactive stance in addressing a labor market nearing contraction, potentially printing negative NFP.
Options Pricing
Indicative only; contact the desk for live pricing:
- Equities: SPX options imply an 88bp move for September 17 expirations (data as of September 12).
- FX: EUR/USD has a 10 vol (~42bp breakeven), USD/JPY has a 15 vol (~63bp breakeven) as of September 11.
US Market Intelligence
We view a dovish cut as the most probable outcome, likely driving positive gains on the day. However, Fed Day could act as a “sell-the-news” event, prompting a 3%–5% pullback as investors reassess macro conditions, Fed policy expectations, stretched positioning, weaker corporate buyback bids, reduced retail investor activity, and quarter-end rebalancing.
Key Catalysts Supporting the Bull Case:
1. PCE (September 26): De-risked by today’s CPI print.
2. NFP (October 3): A higher MoM print could sustain optimism around the macro outlook.
3. CPI (October 15): Will shape expectations for the October 29 Fed meeting, similar to the September setup.
We favor the Bull Case and recommend using any pullback as an opportunity to increase risk exposure.
Post-Pullback Opportunities:
- Sector Preferences: Overweight TMT/MegaCap Tech/AI themes.
- Defensives: Utilities could benefit from a declining 10Y yield, especially if it falls below 3.50%. Healthcare offers strong EPS growth, low positioning, and potential upside from Biotech M&A activity.
- International: Favor EM over DM if the USD weakens. However, stronger US macro data could trigger a USD squeeze, benefiting US equities, particularly TMT.
No Pullback Scenario:
If a dovish cut sustains the Bull Rally without a pullback, the rally may continue, driven by short-covering seen on CPI Day. TMT could remain positive but underperform relative to SPX and RTY.
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• FURTHER OBSERVATIONS – Analyzing the Fed meetings from June 2021 to the present, we observe that the average one-day return for the SPX is +0.2%, with up-days averaging 0.4% and down-days averaging -0.2%. Other notable points include: (i) Tech and Momentum Longs generally perform better across all scenarios; (ii) Energy, Materials, and Value Longs consistently lag in performance; (iii) Emerging Market Equities, particularly driven by China (FXI), perform well, outperforming in all scenarios; (iv) while the MOVE index tends to decline post-announcement, the VIX might not show the same pattern. Additionally, JPM Wealth Management has shared a chart illustrating 12-month returns following the initial Fed rate cut.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!