Federal Reserve cannot cut interest rates in September, but market expectations of future cuts fuel inflationary bubble.

The Federal Reserve's decision to cut interest rates in September is not yet certain, but market expectations of cuts are driving financial markets. The Fed has signaled two cuts by the end of the year, but market expectations are for three cuts. This has inflated a "bubble" in financial markets, driven by anticipation of rate cuts rather than fundamentals.

Market expectations for a September Federal Reserve (Fed) rate cut have surged to 89.2%, according to CME Group's FedWatch tool [1]. This significant increase from 37.7% just one week earlier reflects growing consensus that the Fed may ease monetary policy. The heightened anticipation is driven by weak labor data and dovish signals from officials like Michelle Bowman.

JPMorgan has advanced its 2025 rate-cut forecast to include an earlier reduction in September, followed by three additional 25-basis-point cuts before a potential policy pause [4]. The bank previously projected the first cut to occur in December. This change is attributed to signs of weakness in the labor market and uncertainty around recent developments within the Fed's leadership structure [5].

Fed Governor Michelle Bowman has emphasized the importance of a faster response to a perceived weakening in the jobs market [6]. She has called for three interest-rate cuts this year, signaling growing concern inside the central bank over weakening job growth and softening demand [2]. Bowman's shift from supporting a rate-hold to advocating for cuts comes as the US job market shows signs of strain, with July's jobs report showing just 73,000 new positions and an uptick in unemployment to 4.2% [2].

The market has already begun to react, with the U.S. dollar under pressure and traders pricing in up to 58 basis points of rate cuts by year-end [10]. The possibility of internal dissent within the Fed is also rising, with some analysts suggesting that the presence of Stephen Miran, Trump’s dovish nominee, could lead to three dissenting votes at the September meeting [11].

JPMorgan has positioned Fed Governor Christopher Waller as a potential successor to Chair Jerome Powell, indicating that his appointment would likely be well-received by financial markets due to his clear policy stance and market-friendly approach [13]. Analysts at Barclays concur, noting that Waller’s leadership could provide greater clarity in the Fed’s data-driven decision-making process [14].

As the September meeting approaches, the central bank faces mounting pressure from both financial markets and political forces to ease monetary policy. While the Fed has historically emphasized a data-dependent approach, the convergence of weak labor data, dovish policy signals, and internal political dynamics is increasingly shaping expectations for an earlier rate cut. With the market largely pricing in an aggressive shift, the stage is set for one of the most closely watched Fed decisions in recent years.

References:
[1] https://www.ainvest.com/news/jpmorgan-forecasts-september-fed-rate-cut-rising-dovish-signals-2508/
[2] https://www.wionews.com/business-economy/fed-s-bowman-backs-three-rate-cuts-in-2025-warns-of-labour-market-fragility-1754799297666
[3] https://www.ainvest.com/news/markets-price-93-chances-fed-rate-cut-september-weak-jobs-data-2508/
[4] https://www.ainvest.com/news/jpmorgan-forecasts-fed-rate-cuts-2025-starting-september-reduction-2508/
[5] https://www.marketscreener.com/news/j-p-morgan-sees-fed-cutting-rates-at-each-of-its-next-four-meetings-ce7c5eddda8af222
[6] https://www.morningstar.com/news/marketwatch/2025080991/a-voice-breaking-from-the-fed-ranks-just-heightened-her-push-for-cutting-interest-rates-fast
[10] https://www.reuters.com/world/middle-east/dollar-heads-weekly-loss-dovish-fed-expectations-2025-08-08/
[11] https://www.ainvest.com/news/jpmorgan-forecasts-september-fed-rate-cut-rising-dovish-signals-2508/
[13] https://www.ainvest.com/news/jpmorgan-forecasts-fed-rate-cuts-2025-starting-september-reduction-2508/
[14] https://www.ainvest.com/news/jpmorgan-forecasts-fed-rate-cuts-2025-starting-september-reduction-2508/