Trump's influence casts a long shadow as the Fed faces its most challenging balancing act to date

The U.S. Federal Reserve is widely anticipated to implement its initial interest rate cut of 2025 at the policy meeting scheduled for September 17. This move is being shaped by signs of a softening job market, ongoing elevated inflation, and mounting political pressure from President Donald Trump. Market projections currently assign a 96% chance to a 25 basis point decrease. Federal Reserve Chair Jerome Powell faces the challenge of responding to economic headwinds and inflation risks while maintaining the perception of central bank independence amid political scrutiny.

President Trump has openly advocated for reduced interest rates, even going so far as to mention possible replacements for Powell, such as Kevin Hassett and Christopher Waller. The recent addition of Stephen Miran to the Federal Reserve Board, who will participate in rate-setting votes and is expected to support the administration’s policy goals, has sparked debate about the central bank’s autonomy. Some experts caution that growing political involvement could undermine the Fed’s tradition of independence and complicate future monetary decisions.

In anticipation of a rate reduction, the U.S. dollar has experienced a notable decline, with the Bloomberg Dollar Spot Index hitting its lowest level in three years. This weakening has been supportive for gold and

, though each is reacting to unique influences. Gold has seen a modest pullback from record levels as some investors take profits, whereas Bitcoin has witnessed renewed activity, including a significant $116 million transfer from a previously inactive large holder. Analysts note that Bitcoin’s movements are more closely tied to liquidity and credit availability, while gold is influenced by wider monetary and trade factors.

Powell’s comments following the FOMC’s rate announcement will play a pivotal role in shaping market sentiment. Investors will be attentive to any clues regarding whether the rate cut signals a lone adjustment or marks the start of a more extended easing phase. Aditya Bhave, chief U.S. economist at Bank of America, pointed out that additional cuts may be difficult unless employment data deteriorates further. Powell must strike a careful balance to prevent worsening unemployment or sparking renewed inflation.

Expectations of lower rates are already affecting stock markets, with some analysts projecting that a broader array of sectors could benefit from cheaper borrowing. Historically, cyclical industries like banking, construction, and materials have outperformed in the six months following rate reductions.

strategists and Nelson Yu at AllianceBernstein have identified industrial and banking stocks as overlooked opportunities in the current environment. However, some, including Citi’s Drew Pettit, contend that with a 25 basis point cut already fully anticipated by markets, equities may see a brief pause before rallying again if profits and economic outlooks stay strong.

With the Fed’s actions and Powell’s statements taking center stage, the ultimate impact on world markets remains unclear. A softer dollar could boost global trade and capital flows, while the prospect of large-scale liquidations in crypto derivatives introduces additional uncertainty. Data from CoinGlass shows that open interest in crypto futures has surpassed $220 billion, indicating increased susceptibility to abrupt price changes. Should Bitcoin break out of its current narrow trading band, it could prompt substantial liquidations in both directions, with potential combined losses exceeding $10 billion on the downside and $5.5 billion on the upside.