The Fed is about to cut interest rates, traders are betting on a 25 basis point pricing, and stock market volatility is expected to be lower than usual.

Wall Street traders are almost certain that the Federal Reserve will announce a 25 basis point interest rate cut later today. They are also confident that Federal Reserve Chairman Jerome Powell will signal further rate cuts to support the sluggish labor market. However, at the same time, there is still a possibility of significant market volatility. This expectation has driven the U.S. stock market to climb to historic highs in recent weeks, leading options traders to bet that the market's reaction to the Fed's policy decision will be more stable than usual. Data compiled by Citigroup's U.S. stock trading strategy director Stuart Kaiser indicates that the S&P 500 index is expected to move by about 0.72% on Wednesday, slightly lower than the average actual volatility of 0.77% during the past eight Fed meetings. However, there is still a significant possibility of breakthrough volatility in the market. Federal Reserve officials will update their expectations for the future interest rate trajectory and economic outlook for the next year. Currently, traders have almost priced in "two more rate cuts before the end of the year (25 basis points each)" and expect a total rate cut of about 150 basis points over the next 12 months. If the Fed's "dot plot" shows that policymakers are leaning more hawkish, it could trigger a wave of selling. Powell will also take questions from the media, and if the Fed Chairman expresses hawkish remarks, especially regarding the continued risk of accelerating inflation, it could also suppress the prices of risk assets. Justin Wiggs, managing director of the stock trading department at Strivell Nicola, said, "Given the continued rise in the stock market, the current situation may evolve into a 'buy on expectations, sell after the news comes out' market. But traders are still worried about missing out on further gains (i.e. 'fear of missing out'), so they may take any opportunities for a pullback to add to their positions." Since early April, the market value of the S&P 500 index has increased by $14 trillion, with the index closing on Tuesday just 0.1% below its historical high. Data from Carson Investment Research shows that after President Donald Trump announced tariff plans in April, the index almost fell into a bear market, only to surge by about 30% in the following five months, a rally that has only occurred four times since the 1950s. All factors that have dampened risk appetite, whether it be rising long-term U.S. Treasury yields, unemployment reaching its highest point since 2021, or lackluster performance by some large consumer companies, have proven to be temporary, as buyers continue to inject funds into the U.S. stock market. Bulls in the stock market have historical data to support their stance. Craig Cohen, managing director of global investment opportunities at J.P. Morgan Private Bank, pointed out that historically, the Fed has cut rates 16 times when the S&P 500 index was within 1% of its historical high, and their data shows that the index has always risen a year later, with an average return of nearly 15%. Confidence in this trend continuing has pushed the Chicago Board Options Exchange's Volatility Index (VIX), also known as the "fear index," to near lows not seen since 2025. If the Fed's rate signal is contrary to market expectations, traders may face the risk of "expectations falling short." Max Waterman, senior portfolio manager at Miramar Capital, said, "If Powell shows a hawkish attitude and expresses concerns about inflation accelerating, it will trigger market panic; but as long as he maintains a dovish stance and suggests further rate cuts soon, the stock market will react positively. If the Fed cuts rates significantly, as long as the economy remains strong, it will be beneficial for the stock market." Anna Wang, chief U.S. economist at Bloomberg Intelligence, believes that the Fed will cut rates, but she points out, "Many FOMC officials do not want to cut rates at this meeting, and we expect to see at least some dissenting views." Economists at Barclays, led by Mark Jannone, estimate that the Fed will cut rates this week due to heightened risks in the labor market, and predict a total of three rate cuts this year, with the median in the dot plot dropping to 3.6% by the end of 2025. Andrew Taylor, head of global market intelligence at J.P. Morgan, believes that the market's reaction to the Fed's decision may align with the trends implied by positions in the derivatives market, overall tending towards stability. His research suggests that the most likely outcome is a 25 basis point rate cut by the Fed, and as long as Powell leans dovish and signals "gradual rate cuts," the S&P 500 index is expected to rise by 0.5% to 1%. In a report to clients on Monday, Taylor stated that if Fed officials announce a 25 basis point rate cut, but Powell is reluctant to push for further cuts due to concerns about inflation, J.P. Morgan's trading desk expects the S&P 500 index to close flat or decline by up to 0.5%. J.P. Morgan also highlights a very low possibility (they estimate the probability to be only 7.5%) in which the Fed believes that the weakness in the labor market requires a 50 basis point rate cut, which would disrupt the calm market situation. On one hand, as lower borrowing costs are positive for the economy, the stock market could rise by up to 1.5%; on the other hand, if investors interpret this larger-than-expected rate cut as a signal that "the economic conditions are worse than imagined," the stock market could also fall by 1.5%.