A 25 basis point rate cut is anticipated with traders fully expecting this move. However, the likelihood of a 50 basis point cut remains at around 4%. A decision to cut rates by 50 basis points would be unexpected. The number of policymakers supporting this decision will be a point of interest.

Dissent and Dot Plot Expectations

Miran, Trump’s appointee, is expected to dissent along with possibly Bowman and Waller. Whether more policymakers will join them remains to be seen. In addition to the decision, the latest Fed dot plots will be closely inspected. Discussions will focus on potential rate cuts for 2025 and 2026, with a more dovish stance possibly reinforcing recent market outlooks.

Fed Chair Powell’s press conference will be key to understanding the Fed’s current stance. His communication is likely to follow the tone set in Jackson Hole. If Powell emphasises weakening labour market conditions, it may suggest the Fed is becoming more lenient. Observers will also pay attention to Powell’s comments on inflation. If inflation does not appear prominently in data, traders might continue their current strategies.

Overall, decisions and signals from the Fed will play a crucial role in shaping market expectations and strategies in the upcoming periods.

Market Reactions and Strategies

With a 25 basis point cut almost certain, the immediate trade is not the decision itself but the signals for what comes next. The small 4% chance of a 50 basis point cut means out-of-the-money call options on indices like the S&P 500 are cheap lottery tickets for a major dovish surprise. We should watch the number of dissents closely, as more than three votes for a deeper cut would signal a strong internal push for further easing.

Any dovish language from Chairman Powell, especially an emphasis on the weakening labor market, will be seen as a major green light for risk assets. We just saw the August jobs report come in at a weak 95,000, missing expectations and marking the third straight month of slowing job growth. If Powell highlights this trend, traders should be ready to add to call positions on the Nasdaq 100, betting on growth stocks to lead a rally.

On the inflation front, Powell’s comments are key, but the data gives him cover to sound dovish. The latest August CPI report showed core inflation cooling to a 2.8% annual rate, continuing a trend we’ve observed since the spring of 2025. As long as this remains the case, traders will likely interpret any neutral inflation talk as a reason to continue shorting the U.S. dollar, making put options on the U.S. Dollar Index (DXY) a viable strategy.

The new dot plot will be critical for positioning over the next few months, as it maps out future rate expectations. If the median projection signals more than two cuts total for 2025, it would reinforce the dovish narrative that has been building. This would likely cause a rally in interest rate futures, meaning traders could look at long positions in SOFR futures to profit from falling yield expectations.

We must remember the sharp market reactions to Fed pivots, like the one we saw back in late 2023, where a dovish tilt ignited a powerful year-end rally. Given the uncertainty around the dot plot and Powell’s tone, buying VIX call options or a simple straddle on the SPY ETF could be a prudent way to trade the potential for a significant volatility spike. This allows a trader to profit from a large market move, regardless of the direction.

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