The current market expectation for a Federal Reserve rate cut in September has almost peaked, with many voices claiming the probability of a rate cut has exceeded 90%. However, this almost one-sided judgment is likely a collective misjudgment. In fact, Wall Street institutions are quietly withdrawing, with only retail investors still pouring in, and the divergence between the two sides has reached a historical extreme. More importantly, the latest inflation, employment data, and the potential impacts of tariffs do not support a rate cut.
On Friday, Federal Reserve Chairman Powell will speak at the global central bank annual meeting, and his core intention may be to shatter the market's fantasy about rate cuts. If one still blindly follows the trend at this time, they may be severely 'harvested' by the market. Next, we will use hard data to analyze this 'rate cut dilemma', to see why Powell may release 'heavy signals', why the probability of a rate cut in September may significantly decrease, and how ordinary people should respond.
First, why is the market so enthusiastic about interest rate cuts? According to the CME FedWatch tool, traders are betting that the probability of a rate cut in September is as high as 92%, which means almost everyone believes the Federal Reserve will definitely cut rates next month. However, historical experience tells us that the more uniform the market expectations, the more likely they are to be wrong—the Federal Reserve never acts according to the market's 'script'. In June 2023, the market was convinced that the Federal Reserve would soon cut rates, but Powell sent a hawkish signal; in January 2024, the market bet on a rate cut in March, but the Federal Reserve did not act until June. This time, history is likely to repeat itself, as the latest economic data does not support a rate cut.
Three major ironclad evidence can prove that the conditions for interest rate cuts do not exist:
- Core inflation is rising again, and the 'super core inflation' that the Federal Reserve is most worried about is accelerating. After the release of the July CPI data, many people only saw the overall inflation at 2.7% and felt that inflation was cooling down, making a rate cut stable. But the truth is, the core inflation excluding energy and food is 3.1% year-on-year and 0.3% month-on-month, both accelerating; more troubling is that the 'super core inflation' reflecting service sector inflation surged by 0.55% month-on-month. This kind of inflation is highly correlated with wage growth, and if rates are cut now, it would only add fuel to the fire. Powell has long stated that he will not easily cut rates until inflation returns to 2%; now that core inflation is rising rather than falling, a rate cut in September is almost impossible.
- The tariff 'bomb' has not yet exploded, and commodity prices may soar in the coming months. The Biden administration increased tariffs on Chinese electric vehicles, semiconductors, and steel this year, but the costs have not yet fully passed on to prices. The latest report from Pacific Investment Management Company (PIMCO) warns that the impact of tariffs has a lag, and commodity inflation may suddenly rebound in the coming months. If the Federal Reserve cuts rates in September, it could coincide with a surge in prices caused by tariffs, leading to a second wave of inflation.
- The labor market has not 'collapsed', and the unemployment rate remains at a historical low. Although the market speculates a slowdown in employment, the actual situation is that the unemployment rate is still below 4%, and hourly wage growth is as high as 4.1%. The minutes of the Federal Reserve's July meeting show that two board members have publicly opposed rate cuts, believing the labor market remains strong and that cutting rates would stimulate a rebound in inflation.
In summary, the three major factors of inflation not cooling down completely, a robust labor market, and tariff risks yet to be released determine that the possibility of a rate cut in September is 'nonexistent'.
Next, we analyze the 'heavy signals' Powell may release. His core objective at the global central bank annual meeting is very clear: to dampen the market's expectations for interest rate cuts. An internal Morgan Stanley report reveals that Powell will not give the green light for rate cuts, but will instead emphasize 'data dependence' to cool the market. This means:
- He may state that whether to cut rates in September depends on August data, but the CPI and non-farm payroll data for August will not be released until September, which will instantly halve the probability of a rate cut in September.
- He will hint that inflation still poses risks and warn the market not to be overly optimistic.
- He may indirectly respond to Trump's criticism—recently, Trump has repeatedly accused Powell of 'cutting rates too slowly', and the Federal Reserve needs to prove that it is not politically influenced.
If Powell sends a hawkish signal and emphasizes inflation risks, the market may react as follows: U.S. stocks, especially real estate and technology stocks, may face a sharp drop; the U.S. dollar is likely to strengthen; gold and Bitcoin may collapse in the short term; and interest rate-sensitive assets such as junk bonds and REITs will face significant risks.
The market has now split into two major camps: retail investors are betting wildly on rate cuts (data from Bank of America shows $21 billion flowed into U.S. stock funds in a single week, with retail investors heavily buying real estate stocks and cryptocurrencies, betting on the Federal Reserve 'loosening'); while major Wall Street firms are quietly retreating (Barclays, Bank of America, and Morgan Stanley have all warned that 'the probability of a rate cut is overestimated', and Goldman Sachs even advised clients to hedge against the 'risk of no rate cut in September').
Historical experience shows that when retail investors gamble against Wall Street, the ultimate winners are often institutions. So what should ordinary people pay attention to? First, be wary of the volatility risks of interest rate-sensitive assets; second, closely monitor the changes in subsequent macroeconomic data; most importantly, remain rational—if you do not want to be swept away by market emotions, you need to stay clear-headed at this moment.#俄乌冲突即将结束？
