Trump's Shadow Looms Over Fed's Toughest Balancing Act Yet

The U.S. Federal Reserve is expected to announce its first interest rate cut of 2025 during its September 17 policy meeting, a decision influenced by a cooling labor market, persistently high inflation, and political pressure from President Donald Trump. Markets are pricing in a 96% probability of a 25 basis points reduction, according to current forecasts. This rate cut is seen as a balancing act by Fed Chair Jerome Powell, who must address both economic slowdowns and inflation concerns without appearing overtly influenced by political pressures.

Trump has been vocal in his calls for lower borrowing costs, even naming potential successors to Powell, including Kevin Hassett and Christopher Waller. His recent appointment of Stephen Miran to the Federal Reserve Board has raised concerns about the independence of monetary policy, as Miran will vote on rate decisions and align with the administration’s economic agenda. Analysts warn that political influence could disrupt the Fed’s traditional independence, potentially complicating policy decisions in the future.

The U.S. dollar has weakened significantly in anticipation of the rate cut, with the Bloomberg Dollar Spot Index hitting a three-year low. This depreciation has supported movements in gold and Bitcoin, though each asset is driven by different factors. Gold prices retreated slightly from record highs as investors booked profits, while Bitcoin saw increased activity, including a notable transfer of $116 million worth of BTC by a long-dormant whale. Analysts suggest that Bitcoin’s price is more closely tied to liquidity and credit conditions, whereas gold reacts to broader monetary and trade dynamics.

Powell’s press conference following the FOMC decision is critical for shaping market expectations. Traders and investors will closely watch for signals on whether the rate cut is a one-time adjustment or the beginning of a broader easing cycle. Bank of America’s senior U.S. economist, Aditya Bhave, emphasized the difficulty of subsequent cuts unless the labor market continues to weaken. Powell must navigate these risks carefully to avoid either deepening the jobs slump or reigniting inflation.

The potential for rate cuts has already begun to influence equity markets, with analysts suggesting that a broader range of sectors could benefit from lower borrowing costs. Cyclical stocks in industries such as banking, construction, and materials are expected to outperform, as historical data from past rate-cut cycles shows these sectors tend to rally after six months. JPMorgan strategists and AllianceBernstein’s Nelson Yu have highlighted industrial and financial shares as underappreciated opportunities in a shifting rate environment. However, some analysts, like Citi’s Drew Pettit, argue that a fully priced-in 25 basis points cut may lead to a short-term market pause, followed by renewed buying if earnings and economic outlooks remain positive.

With the Fed’s decision and Powell’s remarks dominating the economic landscape, the broader implications for global markets remain uncertain. A weaker dollar could stimulate global trade and asset flows, while the potential for record liquidations in crypto derivatives markets adds another layer of risk. According to derivatives data from CoinGlass, total crypto futures open interest has exceeded $220 billion, signaling a heightened vulnerability to price swings. If Bitcoin moves outside a narrow range, it could trigger massive liquidations in both long and short positions, with cumulative losses potentially exceeding $10 billion on the downside and $5.5 billion on the upside.