Market Expects Rate Cut, Awaits Fed Projections

Published as of: September 17, 2025, 9:11 a.m. ET

(Wednesday market open) Markets could tread water this morning, barring any outside news, before the Federal Reserve delivers its rate decision and projections at 2 p.m. ET. Futures trading anticipates the first rate cut since last December, and there's still an outside chance of 50 basis points rather than 25. Overnight trading lacked direction and stocks aren't far below recent record highs.

"A 50-basis point cut seems unlikely but not completely out of the realm of possibility," said Michael Townsend, managing director of legislative and regulatory affairs at Schwab. "Powell likely will be asked how the Fed is wrestling with jobs numbers and inflation numbers that are a bit in conflict with each other, as well as how the Fed is working to maintain its independence in the face of unprecedented attacks from the White House." The central bank seems more focused on recent job weakness than inflation, and last week's relatively benign August consumer price data provides wiggle room. Annual inflation, however, remains well above the Fed's 2% target.

In trading yesterday, most S&P 500 sectors clustered around unchanged, with five of 11 higher, led by energy and consumer discretionary after a strong retail sales report. September is historically the worst month for stock performance and the market has built in plenty of optimism around rates and trade. That means it wouldn't be a huge surprise to see some sort of "sell the news" response to the Fed meeting and Fed Chair Jerome Powell's press conference, and volatility futures build in more uncertainty. Markets may be wobbly the next couple of days with quarterly "triple witching" in the options markets Friday.

1. Fed projections awaited as Treasury market eyes more cuts: Though the anticipated 25-basis point rate cut likely dominates headlines later today, the Fed's economic and rate projections carry weight as well. "More interesting than the Fed's next rate cut is how confident FOMC members feel about cutting rates as inflation reaccelerates," said Kevin Gordon, senior investment strategist at Schwab. "With a return to the Fed's 2% target unlikely any time in the near-term, it's clear that the Fed has shifted into risk mitigation mode; especially as labor shows more glaring signs of weakening." One thing to track in projections is where policy makers see rates by the end of next year. The Fed's last outlook pegged the Federal funds rate by the end of 2026 at 3.6%, meaning just three rate cuts between now and then, including the one anticipated today. The target range is currently 4.25% to 4.5%. However, the Treasury market anticipates much lower rates by the end of next year, between 2.75% and 3.25%, according to the CME FedWatch Tool. This implies five or six rate cuts between now and late 2026 and makes the market more dovish than the Fed. If the Fed sticks to its relatively conservative projections and Powell sounds cautious, the Treasury market might throw a tantrum, posing a possible headwind for stocks.
    
2. Rate cuts and likely support for the S&P 500: Bad economic news is often good news for stocks. That's been true lately as the market soared to record highs following August's lackluster jobs report that briefly brought back hopes for a 50-basis point rate cut (which soon faded). With the Fed expected to cut rates today and perhaps two more times this year, the question is whether investors continue to focus on the potential for those cuts to juice growth or the downbeat conditions that prompted the Fed to act. That will depend, of course, on inflation and how the economy and corporate earnings respond to any rate cuts. Lower rates can help corporate margins, though many companies also grapple with potential tariff-related margin hits. "As long as weaker payroll data are not confirmed by sustainable increases in layoffs, the easing in monetary policy will likely be supportive for stocks," my colleague Gordon said.
    
3. Banks abroad meet about rate cuts: While most eyes are on the Fed decision today, the Bank of Japan convenes tomorrow and presents its rate decision early Friday, U.S. time. Other central banks also gather starting today. "The Bank of Canada is expected to cut rates on Wednesday, while the Bank of England and Bank of Japan are expected to be on hold," said Michelle Gibley, director of international research at the Schwab Center for Financial Research. "Looking out to the next 12 months, markets are expecting the Fed to outpace the other major central banks, delivering the biggest cuts in rates. This could keep downward pressure on the dollar. Dollar weakness adds to international returns—the MSCI EAFE Index is outperforming the S&P 500 by over 1,200 basis points this year." Dollar weakness can also favor U.S. companies with the heaviest exposure to foreign demand, including mega caps, tech giants, pharmaceutical companies, and mining and agricultural firms. Info tech, communication services, materials and consumer staples are the sectors with the highest percentages of international revenue, led by info tech with 56% and materials with 52%, according to FactSet.

• Oracle (ORCL) rose 1.5% Tuesday as The Wall Street Journal reported Oracle is likely to be among the firms controlling social media platform TikTok under an emerging deal with China.
   
• General Mills (GIS) fell 1.7% ahead of the open despite beating Wall Street's consensus on earnings per share and delivering revenue in line with expectations. It also reaffirmed its fiscal 2026 guidance.
   
• Nvidia (NVDA) dropped 1% in early trading on a report by the Financial Times that the Chinese government advised the country's tech companies not to buy products made by Nvidia. This comes after Beijing accused Nvidia of violating its anti-monopoly law.
   
• Alibaba (BABA) jumped 2.6% in pre-market trading and the stock is up more than 30% in the past month as investors appear enthused about the company's focus on AI and founder Jack Ma taking a bigger role at the company.
   
• Netflix (NFLX) rose 1% ahead of the open following Loop Capital upgrading shares to Buy from Hold. The analyst pointed to a strong fundamental backdrop, third quarter engagement, a strong fourth quarter content slate, and higher long-term margin assumptions.
   
• Workday (WDAY) climbed 10% in early trading after activist investor Elliott Investment Management disclosed a $2 billion stake in the software firm, Barron's reported.
   
• Eli Lilly (LLY) slipped 1.5% in pre-market trading. Berenberg downgraded the stock to Hold from Buy, saying the obesity market upgrade cycle has plateaued.
   
• Tesla (TSLA) dropped nearly 1% ahead of the open, its first pullback in a while after the stock rallied sharply starting earlier this month. A share purchase by CEO Elon Musk added to the positive tone this week.
   
• In data this morning, August housing starts fell 8.5% month over month to a seasonally adjusted annual rate of 1.307 million units, below the Briefing.com consensus of 1.375 million. Building permits fell 3.7% month over month to 1.312 million on a seasonally adjusted basis, below the 1.37 million consensus view.
   
• The S&P 500 index remains at a historically lofty valuation near 23 times anticipated 12-month forward earnings. Still, it’s important to remember that valuations are not a good short-term timing mechanism. Valuations are a better gauge for longer-term performance.
   
• Warner Bros. Discovery (WBD) plunged more than 6% yesterday. It got downgraded by TD Cowen to Hold from Buy. The firm cited downside risk if the proposed acquisition by Paramount Skydance (PSKY) fails to materialize, Briefing.com noted.
   
• Technically, it's difficult to peg resistance with markets at or near record highs, but it looks like 6,650 for the S&P 500 index might be a level to watch. On any hawkish Fed comments, market weakness might ensue, building the potential for a break to below 6,500.
   
• Volatility may seem light with the Cboe Volatility Index (VIX) under 16, but don't let that fool you. The VIX curve is historically steep, a signal that the front end is depressed relative to futures contracts with longer maturities and a sign that the market builds in uncertainty. Risk sentiment has been suppressed by hopes for Fed rate cuts, but the market is now significantly ahead of the Fed in terms of how many cuts might come. This sets up a situation where a hawkish Fed might unnerve traders basking in the glow of low near-term volatility.

Bitcoin's spot price (/BTC—candlestick) is close to breaking through long-term resistance (top red line) on this five-year log-scaled chart. "This is a function of lower rates and a lower dollar ahead of the FOMC decision," said Jim Ferraioli, cryptocurrency strategist at Schwab. "Bitcoin broke out of this range at the previous all-time high, but was not able to sustain its upward move."

Check out the investors' calendar for a summary of the top economic events and earnings reports on tap this week.

September 18: Expected earnings from FedEx (FDX), Lennar (LEN), and Darden (DRI).
September 19: Bank of Japan rate decision.
September 22: No major earnings or data expected. 
September 23: August existing home sales and expected earnings from Micron (MU) and AutoZone (AZO).
September 24: August new home sales and expected earnings from KB Home (KBH) and Worthington Steel (WS).