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Preview of the Fed's interest rate meeting, whether to hold positions or cash out

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Hello everyone, today XM Forex will bring you "[XM Group]: Preview of the Federal Reserve's interest rate meeting, hold positions or cash out". Hope this helps you! The original content is as follows:

New economic data have continued to confirm that the Federal Reserve has room to cut interest rates. The market has made early adjustments to interest rate expectations, laying a solid foundation for expectations for this high-profile finale. At the same time, the market predicts interest rates this time and will implement the third consecutive 25 basis point interest rate cut this year, lowering the federal funds rate to a range of 3.75%-4%.

The market generally expects that this meeting is likely to be an interest rate cut full of hawkish remarks, because it is a consistent habit of the Federal Reserve to gradually and control market expectations. It will temporarily boost the dollar and suppress gold and other assets in the near future, but it will not change the trend of a weakening dollar in the long term. The long-term products that are optimistic about the long-term will not be substantially negative. However, it should be noted that if there are not too many hawkish remarks, it may mean that the U.S. labor market may be facing a stall, and instead we need to be alert to the risk of bubbles in risky assets such as equity.

Decision-making background: dual economic pressures and data dilemmas intertwined

The Federal Reserve’s policymaking currently faces xm-forex.complex and intertwined economic environments and practical obstacles.

The U.S. economy is encountering the dual challenges of labor market headwinds and tariffs pushing up inflation: On the one hand, the labor market is weakening. As of November, the number of layoffs has exceeded 1.1 million, setting a new high since 2020, with a year-on-year increase of 54%. Recruitment slows down and layoffs surge.

On the other hand, the Trump administration's tariff policy has led to an increase in inflation in recent months, making it difficult to coordinate the Federal Reserve's dual mission of maintaining low inflation and low unemployment.

What is even more troublesome is that due to the long-term government shutdown, the November employment data and the latest inflation data were postponed to 1Announced in mid-February.

This means that the Federal Reserve will make interest rate decisions in the absence of key economic data, which greatly increases the difficulty and uncertainty of policy judgment.

Market Sensitive Indicators: Linked Observation of the Yield Curve and CMBS Spreads

The release of the Federal Reserve’s policy signals will directly affect key market indicators such as the U.S. Treasury yield curve and xm-forex.commercial real estate mortgage-backed securities (CMBS) spreads, becoming an interpretation Important windows for market sentiment, namely the spread between high-risk and low-risk bonds in CMBS and the spread between short-term and long-term U.S. Treasury bonds, are the market’s most intuitive feedback on the market’s judgment on the future of the U.S. economy after the FOMC meeting. The closer the interest rate is, the closer the interest rate is.

It is necessary to focus on tracking the feedback of U.S. Treasury bond yields to the Fed's statement, especially paying attention to the recent market pattern of "long-term yields falling before the meeting and rebounding after the meeting", among which the fluctuation trajectory of medium-term bonds has key reference value.

The current yield curve has shown a typical U-shaped structure: short-term interest rates are anchored by policy expectations, while long-term interest rates remain high due to concerns about term premiums.

If the middle section of the curve declines further and the U-shaped shape intensifies after the meeting, it will directly release the market’s cautious expectations for short-term economic growth.

The current spreads of high-rated CMBS tiers continue to narrow, highlighting the resilience of market demand for safe assets; while the spreads of high-risk tiers remain wide, reflecting the differentiation of risk preferences.

If the Fed expresses its stance on strengthening the certainty of the interest rate path and economic stability, the spread gap between high- and low-rated CMBS is expected to narrow; conversely, if the Fed releases a cautious tone or emphasizes the uncertainty of economic growth prospects, the spread differentiation will intensify, and the spreads of high-risk CMBS levels may further widen, and the same is true for U.S. Treasury bonds.

Core expectations: Continuous interest rate cuts are a high-probability event with far-reaching impacts

From the perspective of market expectations, the probability of this rate cut being implemented is already at a high level. However, the market expects that after this rate cut, the FOMC will not give a positive statement on subsequent interest rate cuts, that is, this rate cut will most likely have a hawkish tone.

CMEFedWatch data shows that the probability of the Federal Reserve cutting interest rates by 25 basis points in December is as high as 88%. This judgment is recognized by most economists. If the rate cut is successfully implemented, it will be the Fed's third consecutive rate cut, and the federal funds rate will officially enter the 3.75%-4% range.

This policy adjustment will have a multi-dimensional impact: For ordinary people, interest rate cuts will directly reduce the annual interest rates of credit cards, home equity lines of credit and other loan costs. In the context of continued increases in daily expenses such as food and medical care, it is expected to alleviate the financial pressure of American families; from a market perspective, the interest rate cut decision will directly dominate interest rate trends, credit pricing logic and investor risk preferences, laying the foundation for the New Year's market pattern.

The core highlights of the meeting: dot plots, press conferences and political games

The core value of this FOMC meeting lies not only in the interest rate decision itself, but also in the tone, background information delivered by the Federal Reserve and the intertwined influence of multiple off-site factors.

Pay attention to the "Economic Forecast Summary" or "Dot Plot", in which the Federal Reserve's expectations for the federal funds rate at the end of 2026 will become the core basis for the market to judge the pace of policy easing next year. It will directly affect the logic of long-term asset pricing and needs to be focused on.

The press conference of Federal Reserve Chairman Jerome Powell also attracted much attention. On the one hand, Powell made it clear in October that a December interest rate cut was not a "foregone conclusion" and emphasized that the job market remains stable. Whether his statement adjusts the tone and how to balance inflation and growth concerns will become the focus of market interpretation; on the other hand, President Trump plans to announce Powell's successor early next year, which makes every statement at the press conference likely to be given more room for political interpretation.

The Federal Reserve’s independence is facing multiple tests. President Trump’s public criticism of the FOMC, the possible appointment of a new chairman, and related cases being heard by the Supreme Court (which may affect its power to fire Federal Reserve Board Governor Lisa Cook) have all made the market full of concerns about the Fed’s ability to maintain policy independence. This factor will also become an implicit focus of market attention.

Expert opinions: There are significant differences, focusing on inflation, growth and policy rhythm

Industry experts have obvious differences in their judgments on this meeting and subsequent policy trends, focusing on the three major dimensions of inflation risk, economic growth and policy rhythm.

David Mericle, chief U.S. economist at Goldman Sachs, supports interest rate cuts. He pointed out that employment growth is not enough to keep up with the growth of labor supply, and the unemployment rate is on the rise, which constitutes the core basis for cutting interest rates. Goldman Sachs analysts added that employment growth in non-medical fields has been negative recently, and xm-forex.companies are focusing on AI to reduce labor costs. Whether the labor market can be stable in 2026 is the biggest uncertainty.

Mark Hackett, chief market strategist at Nationwide, emphasized the "tone-setting" significance of the meeting, believing that the FOMC decision will affect monetary policy expectations, risk appetite and market leadership for the remainder of 2025 and beyond.

Louis Navellier of Navellier & Associates put forward a different perspective. He believes that the risk of inflation has weakened significantly. The decline in housing prices, rents and crude oil prices makes the Federal Reserve need to focus on the risk of deflation.

Risk Factors and Policy Outlook for 2026

This interest rate cut decision still faces multiple risks and uncertainties. There are clear differences of opinion within the FOMC. New York Fed President John Williams and others support interest rate cuts, believing that the weakness of the labor market should take precedence over inflation concerns. However, some members are cautious that interest rate cuts may intensify the risk of inflation. At the same time, the Fed is also facing political pressure from the Trump administration to cut interest rates faster, and its policy independence continues to be tested.

Looking ahead 202In 6 years, uncertainty about the policy path has increased. Economists expect the Federal Reserve to keep interest rates unchanged at its meeting on January 27-28. A FactSet survey shows that this probability is 62%.

If too much hawkish information is conveyed at the meeting, it will be beneficial to the recent rapid adjustment of the U.S. dollar index and cause it to rebound, while temporarily suppressing market risk appetite. Investors should pay attention to the risks of high-valued products, but the overall trend of a weakening U.S. dollar will not be greatly affected. The current rebound of the U.S. dollar index and the adjustment of gold have begun to reflect the short-term negative effects of hawkish interest rate cuts

Market judgments are divided regarding the timing of subsequent interest rate cuts: Economists at AllianzTrade expect that the first interest rate cut may not occur until March. The core reason is that inflation is still higher than the 2% target; and variables in the labor market, especially weak hiring or a surge in layoffs that may result from xm-forex.companies relying more on AI to improve efficiency, will provide support for further interest rate cuts.

Overall, this final battle is not only a summary of the Federal Reserve’s monetary policy in 2025, but also an important indicator of the policy direction in 2026. Every signal released by the Federal Reserve will be transmitted through market indicators such as the yield curve and CMBS spreads, profoundly affecting the New Year's trend of global financial markets.

The above content is all about "[XM Group]: Preview of the Federal Reserve Interest Rate Meeting, Hold a Position or Cash Out". It is carefully xm-forex.compiled and edited by the XM foreign exchange editor. I hope it will be helpful to your trading! Thanks for the support!

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