Will the Fed cut interest rates tonight? The three major ultimate suspense is about to be revealed!

The Federal Reserve will announce the highly anticipated October interest rate decision at 2 a.m. Beijing time on Thursday, with Chairman Powell holding a press conference half an hour later as usual (2:30 a.m.). This is undoubtedly the most important event of this "super week," which covers decisions from the four major central banks of the US, Europe, Japan, Canada, as well as the financial reports of numerous tech giants! Many industry insiders have expressed that the Fed's easiest task on Wednesday may be to announce another rate cut at the end of the two-day policy meeting. However, the real challenge will be how to handle other detailed issues, which are posing significant challenges to the current policy-making process. Since this is not a quarterly decision, this interest rate meeting will not release new economic forecasts or dot plots. Currently, the market generally expects the Federal Open Market Committee (FOMC) to announce a 25 basis point rate cut for the second consecutive meeting tonight, lowering the target range for the federal funds rate to 3.75%4%according to the CME's Fed Watch Tool, the probability of this rate cut currently stands at 99.9%. However, the almost certain expectation of a rate cut this month does not necessarily mean that the Fed's internal agreement on monetary policy outlook is completely unified. In fact, due to the lack of official government data caused by the shutdown, the Fed is currently in an extremely awkward positionduring this week's interest rate meeting, the different decision-makers in the hawk-dove camp are likely to engage in a heated debate on the future path of interest rates, the challenges posed by the lack of economic data, and even whether to end tapering early. Here is our forward-looking analysis of some of the major points of interest for tonight's "rate cut night" at the Fed, which may determine the direction of global financial markets tonight and in the coming period: Mystery one: How will the Fed evaluate the future path of interest rates? Considering that the Fed's rate cut tonight is almost a foregone conclusion, what market traders are most concerned about may be whether the Fed can release more clues about the future policy direction. Fed Chairman Powell expressed concern about the labor market in a speech earlier this month, hinting at his acquiescence to another rate cut in October. Recent private sector data and informal surveys also indicate that the US job market may still be deteriorating. Payroll processing company ADP reported a decrease of 32,000 private sector jobs in September; at the same time, the Fed's Beige Bookan aggregation of reports from various local surveys across the US, used as a reference for Fed meetingsalso paints a picture of a weak job market. However, despite acknowledging risks in the labor market, a significant portion of Fed officials are also concerned about inflation. Data also shows that although the CPI in September was lower than expected overall, the core CPI (considered a better indicator of inflation trends) still rose by 3% year-on-year, a full percentage point higher than the Fed's target. Bill English, a professor at Yale University and former head of monetary affairs at the Fed, pointed out, "In the current policy cycle, there is a real division within the Fedsome believe that while a rate cut may be possible, there is no rush to act, while others argue that despite the risks (of inflation), more aggressive easing measures should be taken now. There is a serious division between those advocating for an immediate rate cut and those who prefer to wait." According to recent statements and mainstream views on Wall Street, Stephen Moore, a newly appointed member of the Fed's Board of Governors by President Trump this summer, is likely to vote against once again supporting a larger rate cutjust as he did at the September meeting. Meanwhile, Presidents Harker of the Philadelphia Fed, Kaplan of the Dallas Fed, and Bullard of the St. Louis Fed may take a more cautious stance on further rate cuts. Among them, Bullard, who is a rotating voter this year, will have a vote at this meeting and industry insiders expect him to be a potential dissenter in favor of "maintaining rates." In this context, many analysts expect Fed Chairman Powell to seek to avoid providing overly clear guidance on the policy path for future meetings in tonight's press conference. Due to the lack of official economic data caused by the shutdown, he is likely to be more cautious. Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, said, "We can only hope that future data releases can help bridge the gap between the hawkish and dovish factions within the Fed. But as long as the divisions persist, Powell will try to avoid signaling too much about the direction of the December and subsequent meetings." Yale professor English also said, "I expect him (Powell) to try to take a middle path, not revealing too much about whether there will be a rate cut in DecemberI don't think he wants to be locked in on a December rate cut. But on the other hand, he also seems concerned about the labor market and the outlook for real activity, so he wouldn't want to appear too hawkish." Mystery two: How does the Fed view the current economic situation in the U.S. amidst data uncertainty? Due to the government shutdown in the U.S., financial markets have been shrouded in data uncertainty this month. During this period, the U.S. Bureau of Labor Statistics only released delayed CPI data for September, giving the market a glimpse of a portion of the economic reality in the U.S. As the Fed's monetary policy statement is released tonight and Powell's press conference is held, market participants will undoubtedly be eager to know how the Fed currently views the economic situation in the U.S. However, the Fed has access to more information and data than the average market participant... Some industry insiders have indicated that investors may need to pay attention to whether the Fed will further highlight statements regarding "downside risks to employment" and "easing inflation pressures" in the monetary policy statement. However, more information and clues may still need to be gathered from Powell's remarks. Luke Tilley, Chief Economist at Wilmington Trust, said, "When you can't get data to achieve at least one of the Fed's dual objectives, it's difficult to formulate policy to achieve two objectives... He was referring to the Fed's dual mandate of maximizing employment and maintaining price stability, as well as the missing September non-farm payroll report due to the government shutdown. "I expect they will convey more uncertainty about the future paththey must be prepared to pivot and stabilize rates; or cut rates faster if necessary when they receive the final data," Tilley said. Tilley believes that the slowdown in the U.S. job market is mainly due to weak labor demand rather than a reduction in labor supply caused by the Trump administration's policies reducing immigration. He does not expect job growth to accelerate. "The job market is a lagging indicator, and there is a risk of continued decline, indicating that the economy has reached a turning point." Patrick Harker, former president of the Philadelphia Fed and current professor at the Wharton School of the University of Pennsylvania, said, "The Fed is in a difficult situation. The current situation seems to be stagflationnot as severe as in the 1970s, but there is indeed a sense of stagflation." "The labor market is clearly weakening. Although we haven't obtained official data, all other indicators show that it is softening. While it hasn't seen a cliff-like decline, it is indeed weakening, while inflation remains persistently high." Harker also believes that inflation is unlikely to ease in the short term, as tariffs are gradually being transmitted to the economic system, and retailers who were previously holding off are starting to raise prices. Mystery three: Will the Fed officially announce the end of balance sheet normalization? Finally, the third major suspense of this Fed decisionundoubtedly, the "end of balance sheet normalization" topic that has been mentioned more and more by investment banks lately. Strategists at JPMorgan and Bank of America have recently forecasted that the Fed may announce at this week's meeting a halt to the reduction of its approximately $6.6 trillion balance sheet, thus ending the process of withdrawing liquidity from the financial markets. These two Wall Street giants have further advanced their window forecasts for the Fed to end quantitative tightening (QT), citing rising costs in the U.S. dollar funding market. From a data perspective, a key consideration for the Fed in deciding whether to continue reducing the balance sheet will be the level of reserves in the U.S. banking systemlast week, reserves fell below the $3 trillion mark for the second consecutive week, just as the Fed is finalizing the adjustment path for its balance sheet. Fed Chairman Powell suggested earlier this month in a speech that once bank reserves are slightly above the Fed's deemed "ample" level, the balance sheet normalization process will stopthe level is the minimum requirement to prevent market turmoil. He hinted that the Fed believes this level is close, stating that the central bank may be near this point in the "coming months." Macro economist Anna Wong said, "The Fed is expected to announce a 25 basis point rate cut at the meeting on October 28-29, but the market is currently unsure whether the FOMC will announce the end of quantitative tightening (QT) at the same time. Our forecast is that the FOMC will officially end QT in November." It is worth noting that a significant transaction in the U.S. interest rate market occurred late last week, seemingly positioning for the Fed's imminent announcement of an end to balance sheet normalization. According to data from the CME Group, last Thursday saw a large transaction involving 40,000 contracts expiring in November, betting that the average secured overnight financing rate (SOFR) in November would only be up by less than 9 basis points compared to the expected federal funds rate. Data shows that the current SOFR is at 4.24%this rate reflects the cost of overnight borrowing in the repo market, where Treasury securities are used as collateral. Meanwhile, the federal funds rate currently stands at 4.11%this rate represents the cost of unsecured overnight loans among banks for meeting reserve requirements. Essentially, this transaction is a bet that if the Fed announces a 25 basis point rate cut and ends quantitative tightening as expected, the November SOFR average rate will drop to 3.95% or lower, while the federal funds rate will be at 3.86% (4.11% - 0.25%) or higher. Steven Zeng, U.S. interest rate strategist at Deutsche Bank, said, "This is a bet that the Fed will announce a halt to QT and announce new policies to calm the funding market, which will reduce the spread between SOFR and the federal funds rate from the current levels." Tilley pointed out, "There are signs that the Fed is nearing the bottom in terms of whether reserves are adequate, and in fact, there is some tension in liquidity. So that's why I expect there will be an announcement of ending balance sheet normalization at (this meeting at least), if not direct action."