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US central bank widely expected to cut rates on Wednesday

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Markets suggest 90% chance of 25 bp cut, 10% chance of 50

bps

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Fed meeting comes on heels of weak US employment reports

By Lewis Krauskopf

NEW YORK, Sept 12 (Reuters) - Investors will look for

the Federal Reserve to communicate how worried it is about the

flagging U.S. labor market at its meeting next week and they

expect the central bank to cut interest rates for the first time

in nine months to shore up employment.

On Thursday, inflation data came in slightly hotter than

expected. Still, market players did not expect this would

dissuade the Fed from easing rates on Wednesday, following

several downbeat reports about U.S. job growth.

More in doubt was the size of next week's cut and how much

the Fed expects to decrease rates in the coming months.

With some recent stability in trade and fiscal policy, "the

Fed has moved back onto the front burner for investors going

forward," said Chris Fasciano, chief market strategist at

Commonwealth Financial Network.

"Now that the labor market is weakening, the Fed becomes the

dominant story for investors as to how they address that,"

Fasciano said.

Expectations that the Fed will reduce interest rates

have helped lift the major U.S. stock indexes to record highs,

along with excitement over the potential of artificial

intelligence, strong corporate earnings and calming fears about

the economic fallout from President Donald Trump's tariffs. The

benchmark S&P 500 is up 12% so far in 2025.

As of Thursday, Fed fund futures indicated that markets were

expecting a 90% chance that the Fed lowers rates by 25 basis

points in next Wednesday's policy decision, according to LSEG

data. The balance of expectations left about a 10% chance for a

larger-than-standard 50 bp cut.

Of the 55 rate reductions in the fed funds rate since 1990, 60%

of those have been 25 basis point cuts, according to Nicholas

Colas, co-founder of DataTrek Research.

Of the 18 times the Fed has cut by 50 bps, all but one

occurred during or just after recessions, Colas said in a

research note. The one exception was in September 2024, which

was the first of three cuts totaling 100 basis points last year,

resulting in the current rate of 4.25%-4.5%.

"Based on this history, which both the Fed and markets know,

a 50 basis point cut would signal that the (Fed) is worried

about the near future of the U.S. economy," Colas said in the

note.

As it stands, Fed fund futures were baking in expectations

of 73 basis points of easing by December or nearly three

standard cuts. The central bank on Wednesday will give its

latest summary of economic projections, updating its view of the

economy and monetary policy.

As the Fed has held steady on rates so far in 2025, Chair

Jerome Powell and other Fed officials have expressed wariness

about Trump's import tariffs possibly leading to higher

inflation as a reason for forestalling rate cuts. Data on

Thursday showed the consumer price index rose 2.9% on an annual

basis in August, including the biggest monthly rise since

January.

While the Fed has a dual mandate to ensure stable prices and

maximum employment, investors will want to hear that the central

bank is primarily focused on supporting the labor market, said

Yung-Yu Ma, chief investment strategist at PNC Financial

Services Group. After back-to-back weak monthly U.S. employment

reports, a government revision this week showed the economy

likely created 911,000 fewer jobs in the 12 months through March

than previously estimated.

"Those job revisions are just so extraordinary that it

demands attention," Ma said. Markets want to hear that "there's

a clear and pervasive shift to making sure that that weakness

doesn't become worse."

Wall Street will also focus on technology shares and the AI

trade after Wednesday's 36% surge in shares of Oracle

pushed the company's market value close to $1 trillion. The

enterprise software maker's stunning stock gains were fueled by

a wave of multi-billion-dollar cloud deals, showing the scramble

for computing power in the AI race.

The Oracle stock surge was "stunning from a market dynamic

standpoint that such a large company would see a market reaction

of that magnitude," PNC's Ma said. "It illustrates about the

economy and about technology and about AI that these

developments are taking place very fast."