There are only a few days left until the Federal Reserve announces its monetary policy meeting decision next Wednesday, and market expectations of a significant interest rate cut by the Federal Reserve have rekindled.

On Friday of this week, bond traders expect the probability of a 50 basis point interest rate cut by the Federal Reserve to reach 40%, far surpassing 4% earlier this week. Futures tied to the Federal Reserve's policy interest rate show that traders expect the probability of a 50 basis point interest rate cut by the Federal Reserve to rise to about 47%, making it almost a 50-50 chance, compared to the probability predicted on Thursday of only about 28%.

Some media have pointed out that the core CPI growth in the United States in August, which was announced this Wednesday, was stronger than expected, and the U.S. labor market remained relatively strong. These signs have made traders almost completely disbelieve that the Federal Reserve will make a significant interest rate cut. The reason for their big change in position on Friday is that The Wall Street Journal, in an article published on Thursday, reported that Federal Reserve policymakers are considering whether to make a routine 25 basis point interest rate cut or a larger 50 basis point cut.

The above-mentioned report is the analysis article by Nick Timiraos of The Wall Street Journal that was mentioned earlier by Wall Street News. The article states that recent data has been "mixed" in terms of both inflation and employment, and has not provided a clear indicator of the magnitude of the interest rate cut. Starting with a 25 basis point cut is the least resistance path, as it can avoid market panic caused by a significant rate cut, as well as the challenge of explaining a large rate cut before the election. But if the Federal Reserve is expected to make a total of 100 basis point cuts this year, starting with a 25 basis point cut may be a bit awkward: since a larger rate cut is expected later this year, why not take action earlier?

Some media have also pointed out that the speech by Bill Dudley, former Vice Chairman of the Federal Reserve and former President of the New York Fed, at a forum in Singapore on Friday has also fueled expectations of a significant interest rate cut. Dudley said, "I think there is ample justification for a 50 basis point rate cut, whether or not they (the Federal Reserve) actually cut rates." Dudley said that the current rates are 150 to 200 basis points higher than the so-called neutral rate that neither restricts nor stimulates the economy, "So the question is, 'Why aren't you taking action?'"

The expectation of a 50 basis point interest rate cut has reignited the rotation in the U.S. stock market on Friday, with investors shifting to stocks that would benefit the most from the Federal Reserve's loose monetary policy. One obvious sign of the rotation is that small-cap stocks outperformed large-cap stocks. The S&P and Nasdaq each rose by no more than 0.9% intraday when hitting daily highs, while the Dow rose by nearly 1.1% when hitting daily highs, and the small-cap Russell 2000, which is dominated by value stocks, rose more than 2% at midday and over 2.5% when hitting daily highs.

BTIG's Director General Manager and Chief Market Technician Jonathan Krinsky commented:

"The biggest news in the past 24 hours is the change in the possibility of a 50 basis point rate cut by the Federal Reserve next week. Small cap stocks have provided a better risk/reward in the short term, and we believe blue-chip technology stocks may pause once again, although they will definitely participate if the S&P 500 sets a new high."

TCW Group's Chief Investment Officer Bryan Whalen said: "If the Federal Reserve cuts rates by 25 basis points next week, they will fall behind the curve." He stated that if unexpectedly weak U.S. retail sales data is released before the end of the next week's Fed meeting, the momentum for a 50 basis point rate cut next week will increase. "If they only cut rates by 25 basis points, this is more favorable for the bond market because it means the Fed will have to take more aggressive actions in the future."

Expectations of a significant rate cut intensified, with U.S. bond yields generally falling on Friday, causing the dollar to weaken. The more interest rate-sensitive 2-year U.S. bond yield briefly fell below 3.57% during the session, approaching the intraday low since September 2022 created on Wednesday.

The US dollar index fell below 100.90 in pre-market trading, dropping during the week after repeatedly hitting over a week high on Wednesday and Thursday. The Japanese yen surged, with the USD/JPY falling to 140.29 during the session, hitting the lowest level since the end of December last year, dropping over 1% intraday.

Rate cuts are good for gold, with gold prices hitting a historical high for the second consecutive day. While U.S. stocks hit another intraday record high during midday trading, spot gold rose above $2586, gaining over 1% intraday, while New York gold futures surpassed $2610, rising 1.3% intraday.

The cryptocurrency market is also exploding across the board, with Bitcoin returning above the $60,000 mark and a cumulative increase of approximately 13.39% this week. The second-largest Ethereum rose 2.99% in the closing session, reaching $2,430.50, with a weekly increase of 10.83%.

Will the Federal Reserve cut interest rates as expected by the market in this meeting? What impact will it have on the stock market? Welcome mooer to make an appointment to watch the September FOMC interest rate meeting~

Editor/Somer