If the interest rate is cut by 50 basis points, what risks does it pose to the market?

Goldman Sachs "sings against" the expectation of a 50 basis point rate cut: pricing is too aggressive, expectations may fall short.

On the eve of the Federal Reserve's decision, boosted by the views of mainstream financial media such as "Fed Communication Agency," the probability of pricing in a 50 basis point rate cut in the swap market has now surged well above 50%.

However, Goldman Sachs FICC trader Borislav Vladimirov issued a warning that there is a risk of expectations falling short.

Vladimirov pointed out that based on the current asset performance, in September, gold, U.S. long bonds, and the yen outperformed other assets, while the Nikkei index, energy, and the Euro Stoxx 50 index incurred losses. This kind of market performance usually accompanies weak U.S. and global economic growth, leading to a general expectation in the market for central banks to ease monetary policy and engage in "quantitative easing (QE) trades."

In other words, the current market pricing is relatively aggressive, unless there is a new large-scale global recession or crisis prompting the Federal Reserve to adopt new QE policies, market expectations will definitely fall short, thereby negatively impacting market sentiment and asset prices.

Looking ahead, even if the Federal Reserve implements a larger 50 basis point rate cut, if the economic conditions do not significantly improve, the pace of subsequent rate cuts may also be slower than market expectations.

If the Federal Reserve is perceived by the market to slow down its actions, the financial conditions index (FCI) will tighten again, leading to lower oil prices, downward inflation expectations, which may exert upward pressure on real interest rates and strengthen the U.S. dollar.

Therefore, the report points out that the initial 50 basis point rate cut should not be seen as a green light for selling volatility or engaging in long arbitrage, as the risks of data or policy surprises are high in this macro environment.

However, Vladimirov also pointed out that the short-term risks are not significant. If the Federal Reserve decides to cut rates by 50 basis points as scheduled on Wednesday, boosted by risk sentiment, risk assets may further rebound in the next 5-10 trading days.

The report notes that considering the Fed will announce the latest 2025 interest rate trend "dot plot" at this meeting, the market will seek clearer guidance from the Fed on the future pace and scope of rate cuts, which will also to some extent affect the market performance in September.

In the "dot plot" released by the Fed in June, the median of the predicted range for the policy rate in 2025 was raised from 3.75% in March to 4.15%. The report states that if the "dot plot" released this time shows that the median policy rate forecast returns to the level of March or lower, this would mean that the Fed's monetary policy stance is more dovish. **