‘Peak Goldilocks’: The markets have bought the Fed rumors — watch for them to sell on the news | Fortune

The optimism is being driven by baked-in expectations that the U.S. Federal Reserve will deliver a 0.25% interest rate cut tomorrow. The cliché here is that the markets appear to have bought on the rumour of the cut, and once Chairman Jerome Powell delivers it, will lock in those profits by selling on the news. CME’s Fed Funds futures market—usually an accurate predictor— says there is a 96.1% chance of the Fed delivering a 25bps cut to the 4% level on Wednesday.

The Fed is likely to cut by 25 bps and not 50 because central banks like to keep their weapons in reserve for the future. The faster you shoot your bullets, the more quickly you run out of bullets, basically.

Goldman Sachs called this “peak Goldilocks” for stocks in a note to clients this morning. “Markets continued a broad ‘risk-on’ shift last week, boosted by the rally in Oracle following their bullish cloud revenue revisions, which supported the broader AI space. US inflation data was broadly in-line with expectations with a modest uptick in initial jobless claims, further supporting the Goldilocks backdrop, where a weak US labour market and anchored inflation allow for Fed easing,” the bank’s Christian Mueller-Glissmann and team wrote.

So the meeting will be boringly predictable, right?

Nope. 

It will be tense. Chair Powell and Governor Lisa Cook have both been accused of criminal behaviour by the Trump Administration. They will be sitting across the table from Stephen Miran, a newly appointed Fed Governor parachuted into the Federal Open Markets Committee by President Trump, who wants to pressure the central bank to cut rates fast. God knows what they will say to each other during the coffee breaks.

Markets will move on Wednesday after Wall Street parses Cook’s statement and his Q&A for clues about future rate cuts beyond Wednesday. Here’s what analysts are saying about that:

“A 25bp rate cut is fully priced in, with a slim chance of a larger 50bp move following recent signs of labor market cooling. Investors will focus on the Fed’s updated macro projections – especially the rate path – with expectations leaning toward continued easing through year-end. The vote split will also be closely watched, as a three-way division among FOMC members hasn’t occurred since 2019,” Convera’s George Vessey told clients.

“If Chair Powell repeats the cautious guidance from his speech at Jackson Hole in August, markets could abruptly reprice their aggressive pre-meeting rate cut expectations,” said Bill Adams, Chief Economist for Comerica Bank.

“The market reaction is likely to be driven by the communication, the updated dot plot, and any comments from Chair Powell on the conditions required for further rate cuts.” David Doyle, head of economics at Macquarie Group said.

In all these potential scenarios the Fed is expected to continue delivering new rounds of cheaper money in the future—and that will be bullish for stocks. There’s only one thing going down in all of this: lower interest rates on the dollar sank the currency to its lowest point year-to-date. The USD lost 0.87% of its value on the DXY index in the last month—that’s a lot for a currency. It has lost 10.56% year-to-date.

Here’s a snapshot of the markets globally this morning:

• S&P 500 futures were up 0.19% this morning. The index closed up 0.47% in its last trading session.
• STOXX Europe 600 was down 0.26% in early trading. 
• The U.K.’s FTSE 100 was down 0.28% in early trading.
• Japan’s Nikkei 225 was up 0.3%.
• China’s CSI 300 was down 0.21%. 
• The South Korea KOSPI was up 1.24%.
• India’s Nifty 50 was up 0.68% before the end of the session.
• Bitcoin rose to $115.7K.