Tianfeng: There are 3 possible scenarios for the future interest rate cut path of the Federal Reserve. Which one is the most likely?

Tianfeng released a research report stating that in September FOMC meeting, the emphasis was on slowing employment and raising the interest rate cut expectations for 2025; Powell mentioned "risk management rate cuts" and maintained a dovish but cautious stance; in terms of market reaction, the market sensed the caution behind Powell's interest rate cut. The future interest rate cut path of the Federal Reserve summarizes three scenarios: a soft landing, recession, and high inflation. The soft landing scenario is the baseline scenario with the highest probability. Key points of Tianfeng's analysis are as follows: September FOMC meeting: emphasis on slowing employment, raising interest rate cut expectations for 2025 The September Federal Reserve meeting lowered the federal funds target rate by 25 basis points, as expected, marking the first rate cut this year. Overall, the meeting statement emphasized the risks of declining employment, with the dot plot indicating two more rate cuts within the year. Meeting statement: emphasizes the risks of declining employment. The statement removed the phrase "labor market remaining strong" and added "employment growth slowing down" and "risks of declining employment increasing". Economic forecasts: improved growth expectations, moderate inflation adjustments. Compared to the June forecasts, the Federal Reserve raised the GDP forecasts for 2025, 2026, and 2027; slightly lowered the unemployment rate forecasts for 2026 and 2027; and raised the core PCE forecast for 2026. Dot plot: the interest rate cut expectations for 2025 increased from 2 to 3 times; future expectations show increased divergence. The FOMC members predict a total of 3 interest rate cuts in 2025, with 2 more rate cuts within the year (compared to the June dot plot forecast of 2 cuts in 2025). One more cut is expected in 2026, and two cuts in 2027, indicating further internal divergence within the committee. Powell: "Risk management rate cut", dovish but cautious Federal Reserve Chairman Powell's stance remains moderately dovish, referring to this cut as a "risk management rate cut", stating that a large rate cut is unnecessary, and the future interest rate path is not guaranteed. Regarding employment, Powell mentioned that the unemployment rate is still low but rising, with increased risks of declining employment; however, he also pointed out that the slowdown in employment growth may be due to "reduced immigration and decreased labor force participation" and that "artificial intelligence AI may be one of the reasons for the slowdown in hiring". Regarding inflation, Powell mentioned that tariffs have led to price increases in goods, expecting inflation to rise this year, but the base scenario is that the impact of tariffs on inflation is one-time, and the risks of higher and more sustained inflation since April may have decreased. Concerning the interest rate path, Powell stated that this rate cut is a "risk management rate cut", with no need for a 50 basis point cut, and future policy decisions will be data-dependent. Market reaction: the US bond yields closed higher on the day, US stocks were mixed, and gold fell. Following the FOMC statement, the yields of the 2-year and 10-year US bonds both declined, but as Powell's press conference progressed, bond yields rose again; the US dollar also initially fell before rising again; the main reason for this fluctuation is Powell's cautious stance on future interest rate cuts and the tension between employment and inflation targets, with future decisions relying on data. Rate cut expectations: CME data shows that the market's confidence in two more rate cuts this year has increased, but expectations for the pacing of rate cuts in 2026 have been delayed. The Federal Reserve's future interest rate cut paths, three scenarios Three scenarios have been summarized for the future interest rate cut paths. Scenario 1 (soft landing): In this scenario, the US economy achieves a "soft landing", avoiding a major recession or hyperinflation. Two more rate cuts are expected this year, and next year, being a midterm election year, there may be political pressure from Trump for rate cuts, combined with Trump's increasing intervention in the Federal Reserve Board, which is expected to continue pushing for three more rate cuts. Scenario 2 (recession): If the economy deteriorates unexpectedly, with a sudden rise in unemployment rates or a risk event such as a "stock market crash", the Federal Reserve may significantly cut rates to support the economy, even by 50 basis points at once. Scenario 3 (high inflation): In the case of historic high inflation or "hyperinflation", the Federal Reserve may prioritize controlling inflation and maintaining higher interest rates for a longer period. Scenario 1 is the baseline scenario with the highest probability; currently, the probabilities of scenarios 2 and 3 are lower. Among the six indicators used to determine a recession by the NBER, the non-farm employment growth rate and personal real consumption growth rate have shown signs of weakness, while the other four indicators have not yet shown a clear downward trend. Risk factors: Unexpected changes in the fundamentals of the US economy, Trump's policies, and Federal Reserve policies.