Most banks anticipate a 25 basis points (bps) cut by the Federal Reserve, already reflected in market pricing. This minimal reduction might not impact markets significantly unless accompanying guidance changes.

A few banks predict a more substantial 50 bps cut, which could lead to a weaker USD, a surge in Treasury prices, and a boost in equities and gold. The banks supporting a 25 bps cut include BMO, Barclays, CIBC, Goldman Sachs, JPMorgan, Morgan Stanley, Nomura, RBC, Scotiabank, and Wells Fargo.

Market Reaction to Divergent Expectations

Standard Chartered and Société Générale expect a more aggressive 50 bps reduction. The 50 bps cut could potentially cause a considerable market reaction, contrasting with the minimal change expected from the consensus 25 bps cut.

We are seeing the market fully price in a 25 basis point rate cut for the upcoming Fed meeting. Because this is the consensus view, the cut itself is unlikely to generate a significant move. The focus for traders should be on the Fed’s forward guidance and any surprise shifts in their economic projections.

Recent economic data supports the case for an initial easing step. The latest jobs report from August 2025 showed the unemployment rate ticking up to 4.2%, and last week’s CPI data revealed that core inflation has cooled to 3.1% year-over-year. These figures give the Fed cover to cut, but the inflation reading is still high enough to make a larger 50 basis point move a significant surprise.

Given that a 25 basis point cut is expected, implied volatility on index options is elevated, with the VIX hovering around 18. Traders who believe the Fed will stick to the script and not deliver a hawkish or dovish surprise could consider strategies that profit from a decline in volatility after the announcement. This involves selling options, like short straddles on the SPX, to collect the high premium ahead of the event.

Positioning for Rate Cuts and Market Dynamics

For those positioning for the less likely 50 basis point cut, cheap, out-of-the-money call options on equity indices offer a compelling risk-reward profile. A surprisingly large cut would likely trigger a strong risk-on rally, causing these options to appreciate significantly. Similarly, buying call options on gold miners or put options on the U.S. dollar index would be an effective way to play this scenario.

Looking back from our perspective today in 2025, we can recall the market’s reaction to the Fed pivot that began in late 2023. The initial cuts then did not cause a sustained rally until the guidance confirmed a clear path of continued easing. This historical precedent reinforces that the press conference and dot plot will be more important than the rate decision itself for determining market direction over the next few weeks.

In the Treasury market, futures contracts on the 10-year note saw significant buying ahead of the meeting. Traders anticipating the aggressive 50 basis point cut have been buying call options on Treasury bond ETFs like TLT. If the Fed delivers the bigger cut, we would expect a sharp rally in bond prices as yields fall.

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