The Federal Reserve's expectations for interest rate cuts next year have significantly diminished, and Powell may temporarily "keep things calm"!

At 2:45 AM Beijing time on Thursday, Federal Reserve Chairman Jerome Powell was invited to an interview at the DealBook/Summit conference hosted by The New York Times. There is no doubt that he will be asked a series of sharp policy questions. When the Federal Reserve finally began its long-awaited interest rate cut cycle in September, the market believed it was too dovish. At that time, the Federal Open Market Committee (FOMC) cut rates by a significant 50 basis points and projected an additional 150 basis points cut by the end of 2025. In response, traders pushed up bond yields and the dollar. The market took more than two months to reprice the Fed's rate cut outlook This seemingly counterintuitive reaction indicates a widespread belief that as the Fed begins to cut rates amid rapid economic growth, inflationary pressures may re-emerge, making such a scale of stimulus unlikely to materialize. The price growth expectations reflected in the bond market—the so-called "breakeven inflation rate"—rose sharply. Two months after this repricing wave, the yield on the 10-year U.S. Treasury bond fell by nearly 6%, while the average exchange rate of the dollar against major currencies rose by nearly 8%. As for the Fed itself, it has softened its language, emphasizing that rate cuts will not be on autopilot and that it will be prepared to address re-inflation risks, even if it cuts rates by another 25 basis points in November. Currently, federal funds futures imply a 73.8% chance that the Fed will cut rates by another 25 basis points at this month's FOMC meeting. The market also expects a total cut of 63 basis points in 2025. This equates to at least two standard-sized cuts, with a 52% chance of a third cut. Will Powell once again leave traders scrambling? The minutes from the November FOMC meeting indicated that "the vast majority" of participants expect a 25 basis point cut in December. This aligns with the September forecast, which predicted that the Fed would cumulatively cut rates by 100 basis points in 2024, having already cut 75 basis points to date. If the next policy move is almost a foregone conclusion, then the outlook for next year will become a topic of active speculation. Since the Fed began easing in September, market bets on rate cuts for next year have been halved. Will Powell's comments spark ongoing adjustments? Overall, this seems unlikely. The FOMC minutes show that despite some recent stagnation, the vast majority expect inflation to sustainably achieve the 2% target. "Many" participants expressed regret over data volatility and emphasized that they would focus on underlying trends. Powell may try not to disrupt the status quo, especially with key employment data yet to be released. If Powell's dovish speech does not make headlines, it may greenlight the stabilization of interest rate cut expectations in the market over the past two weeks. Bonds have started to rise slightly, and the dollar has already retreated. This adjustment may still have room to run.