As of August 5, 2025, the probability of a September interest rate cut by the Federal Reserve shows a complex pattern of high expectations and high uncertainty coexisting. The following analysis is conducted from four dimensions: the latest data, market dynamics, institutional views, and potential variables.
I. Market Expectations: The probability of an interest rate cut has risen to historically high levels.
CME FedWatch Tool data shows that the probability of a 25 basis point rate cut at the September meeting has reached 94.4%, while the probability of maintaining rates unchanged is only 5.6%. This expectation has surged significantly from 45% after the July meeting, primarily driven by the following factors:
The employment market has deteriorated sharply: in July, the increase in non-farm employment was only 73,000, far below the expected 110,000, and the cumulative downward revision of the data for May and June was 258,000, with the unemployment rate rising to 4.2%. Atlanta Fed President Bostic candidly stated that this is 'a real signal of a slowdown in the labor market', and market concerns about a recession have sharply intensified. The market pricing of policy divergence: Governors Waller and Bowman publicly supported interest rate cuts again, emphasizing that weakness in the labor market may pose a risk of layoffs. Although Federal Reserve Chair Powell did not explicitly rule out an interest rate cut in September during the July meeting, the market has interpreted his 'data dependence' statement as a 'default interest rate cut path'.
II. Core Contradiction: The game between inflation stickiness and employment deterioration.
(1) Three main logics supporting interest rate cuts: A substantive turning point in the labor market.
The July non-farm data is not only weak in total but also significantly deteriorated in structure: the year-on-year growth rate of hourly wages rose to 3.9%, higher than the expected 3.8%, indicating increased cost pressure on employment for companies, which may suppress hiring willingness; the manufacturing PMI fell to 48 (expected 49.5), reaching a new low since October 2024, further verifying the trend of economic slowdown.
This 'employment-growth' dual weakness pattern makes it difficult for the Federal Reserve to maintain high interest rates by citing 'stability in the labor market'. The self-reinforcing expectation of interest rate cuts.
The market's bets on interest rate cuts have formed an expectation loop: the 2-year U.S. Treasury yield plummeted by 24 basis points to 3.68% after the non-farm data was released, reflecting funds positioning in advance for interest rate cut benefits; the volatility index (VIX) soared by 29% to 35.8, showing that investors are hedging against the risk that interest rate cuts may fall short of expectations.
Such market pricing may force the Federal Reserve to take action to avoid expectations getting out of control. The manifest political pressure.
The Trump administration continues to exert pressure, not only publicly criticizing Powell's 'incompetence' but also hinting at possibly influencing Federal Reserve decisions through personnel adjustments. Although Powell emphasizes 'policy independence', the resignation of Governor Cook (effective August 8) may create space for Trump to nominate more dovish officials, further disrupting market expectations.
(2) Two major risks against interest rate cuts: inflation stickiness exceeds expectations.
The core CPI in August rose by 0.28% month-on-month, and super core inflation (excluding energy and housing) rose to 0.33%, reaching a new high since 2024. The lagging transmission effect of tariffs on inflation has not yet fully manifested: the 'reciprocal tariffs 2.0' that took effect on August 1 will affect September import data and may transmit to terminal consumer prices in October-November; CICC estimates that if tariffs remain at current levels, core PCE inflation may be revised up by 0.7-1.2 percentage points. Hawkish voices within the Federal Reserve.
Although Waller and Bowman advocate for interest rate cuts, some officials still emphasize inflation risks: Harker pointed out that 'inflation deviation is much greater than employment deviation', advocating prioritizing price control; Bostic believes that 'the current economy can still withstand high interest rates', expecting only one interest rate cut within the year.
This divergence may lead the Federal Reserve to choose to wait and see rather than act at the September meeting, especially if the August inflation data rebounds again.
III. Divergence of Institutional Views: A September interest rate cut is still mainstream, but beware of the 'shoe dropping' risk. The hawkish camp: The timing of interest rate cuts may be delayed until November.
Institutions such as China Merchants Securities and CICC believe that the impact of tariffs on inflation has a slow-burning characteristic: new tariffs in August need to be reflected in the September import data, and will significantly affect the CPI in October-November; if the core CPI in September breaks above 3.3%, the Federal Reserve may delay action until the November meeting. The dovish camp: the probability of a September rate cut is approaching certainty.
CITIC Securities pointed out that Powell hinted at the July meeting that 'tariff inflation is a one-time shock', opening up space for interest rate cuts. Huatai Securities emphasized that if the August non-farm employment is again below 100,000, it may trigger an increase in expectations for 'emergency interest rate cuts'. Data dependence: July-August data becomes a key variable.
The Federal Reserve's September decision will focus on two sets of data: August non-farm employment: if new jobs continue to be below 100,000, the probability of an interest rate cut may rise to 99%; August core CPI: if the month-on-month increase exceeds 0.3%, it may trigger concerns about an 'inflation spiral', causing expectations for interest rate cuts to cool to below 70%.
IV. Scenario Simulation and Trading Strategy.
(1) Benchmark Scenario (Probability 60%): Conditions for a 25 basis point rate cut in September: August non-farm employment increase < 100,000, core CPI month-on-month < 0.25%, and Powell releases clear signals at the Jackson Hole annual meeting. Market Impact: The U.S. dollar index may fall below 97, gold may break through $3,400/ounce; U.S. tech stocks (such as Nvidia, Tesla) may welcome valuation repair, while bank stocks (such as JPMorgan) may be under pressure.
(2) Risk Scenario (Probability 30%): Conditions for delaying interest rate cuts until November: August core CPI month-on-month > 0.3%, and manufacturing PMI rebounds above 50. Market impact: The 2-year U.S. Treasury yield may rebound to 4.0%, while the 10-year yield breaks through 4.5%; the U.S. dollar index strengthens to 101 in the short term, and emerging market currencies (such as the Mexican peso) face depreciation pressure.
(3) Black Swan Scenario (Probability 10%): Conditions for maintaining interest rates unchanged: Trump announces a 25% tariff on EU cars, causing core PCE expectations to jump by 0.5 percentage points. Market Impact: The volatility index (VIX) could soar above 50, and U.S. stocks may drop more than 3% in a single day; gold, as an inflation hedge tool, may see prices break through $3,500/ounce.
V. Conclusion and Recommendations: The current probability of a September interest rate cut by the Federal Reserve has entered a high probability and high game stage. Investors need to focus on three major variables:
Data Window: The July core CPI to be released on August 16 and the August non-farm data to be released on September 6 will become the 'final touch'; Official Statements: Powell's speech at the Jackson Hole annual meeting on August 22 may release key signals; Geopolitical Risks: The adjustment rhythm of Trump's tariff policy and the chain reaction of the global supply chain.
Strategic Recommendations:
Long positions: Allocate 30% of the portfolio to interest rate-sensitive assets (such as NASDAQ 100 ETF), and buy call options for 2-year U.S. Treasuries expiring on September 20; Hedge: Hold a 10% position in gold ETF (such as GLD), and sell put options for the S&P 500 index expiring in September to reduce costs; Caution: If the August CPI data exceeds expectations, timely take profits and shift to shorting the euro against the dollar (target 1.05).
In summary, although the market has almost 'priced in' a September interest rate cut, the Federal Reserve's final decision may still undergo dramatic twists due to inflation stickiness, political interventions, and data fluctuations. Investors need to seek a balance between high positions and strong hedges, avoiding excessive exposure to a single scenario.