Will the Fed's September 18, 2025 interest rate decision lean hawkish? Here are the key indicators to watch for short-term moves in U.S. stocks!

The Federal Reserve cut interest rates by 25 basis points as expected, lowering the target range for the federal funds rate to between 4.00% and 4.25%. This marks the first rate cut by the Fed since December 2024. However, markets are more focused on the remarks made by Fed Chair Jerome Powell during the subsequent press conference, as well as the dot plot projections provided by Fed officials.

According to the latest dot plot, officials largely agree that there will be two more rate cuts by the end of 2025, with interest rates expected to fall by an additional 50 basis points. However, there is significant divergence between the Fed's outlook for the end of 2026 and market expectations. Officials generally believe that only one rate cut will be necessary by the end of 2026, with rates remaining largely unchanged in 2027, 2028, and over the long term. This suggests that the Fed currently anticipates rates remaining higher than market expectations, contributing to volatility in the stock, bond, and foreign exchange markets following the interest rate decision. $U.S. 10-Year Treasury Notes Yield(US10Y.BD)$ Yields fell to a low of 3.99% before rebounding, briefly rising to 4.09%; $USD(USDindex.FX)$ Dropping to a three-year low of 96.214 before recovering. In the stock market, $S&P 500 Index(.SPX.US)$ and $Nasdaq Composite Index(.IXIC.US)$ performance has been mixed but stable, $Dow Jones Industrial Average(.DJI.US)$ with particular attention on financial stocks $JPMorgan(JPM.US)$ $Goldman Sachs(GS.US)$ Benefiting from the cooling expectations of interest rate cuts, there was a rise against the market trend. The dot plot clearly demonstrates that Federal Reserve officials have adopted a hawkish stance regarding rate cuts.

Below are the changes in expectations for CME interest rate futures before yesterday's lecture and as of today ~

The above changes show that following the FOMC meeting, the market’s expectation for interest rates by the end of 2026 has decreased by 50 basis points compared to previous forecasts, with two fewer cumulative rate cuts anticipated. The hawkish stance demonstrated in the Fed’s dot plot has tempered expectations for rate cuts. The latest interest rate futures indicate that the Fed will cut rates five times by the end of 2026, bringing the target interest rate range back to 2.75-3.00%.

However, investors should carefully note that the biggest difference in the abovementioned rate-cut expectations is not the reduced room for cuts; the Fed has merely eliminated the possibility of a one-time 50-basis-point cut. The pace of rate cuts will remain gradual and will be determined based on economic conditions. From an economic perspective, the Fed's continued hawkish stance on monetary policy reflects optimism about the economic outlook. If downward pressure on the economy increases, Fed officials will naturally adopt a more dovish attitude toward rate cuts. Based on the macroeconomic trends in the US over the past few months, along with movements in interest rate futures and statements from Fed officials, the expectation of the "Fed Put"* remains unchanged.

*Fed Put is a term used in financial markets referring to the Federal Reserve's (Fed) tendency to implement accommodative monetary policies, such as rate cuts or quantitative easing, to stabilize markets and prevent crashes when the economy or markets face significant downside risks. This acts like an invisible "insurance policy," leading investors to believe that the Fed will intervene at critical moments to support the market.

The Fed's current monetary policy remains biased toward tightening. In addition to the reduction in rate-cut expectations, the Fed will continue its quantitative tightening (QT), reducing its holdings of US Treasuries and mortgage-backed securities (MBS) at a pace of $5 billion and $35 billion per month, respectively.

However, the same dot plot shows that the Fed estimates this year’s unemployment rate at 4.5%, consistent with the June forecast of 4.5%; next year’s rate is projected to be 4.4%, revised down from the prior estimate of 4.5%; for 2027, it is expected to be 4.3%, adjusted from the earlier prediction of 4.4%; for 2028, it is forecasted to be 4.2%; and the longer-term estimate remains 4.2%, unchanged from the previous forecast. The data indicates that the Fed maintains a relatively optimistic outlook for the labor market. However, the statement issued after the meeting emphasized "close monitoring of the labor market," suggesting that if unemployment rises unexpectedly, the Fed may quickly pivot to an accommodative policy. This reflects the shadow of the "Fed Put."

Impact on Market Conditions

Following the interest rate announcement, the performance of bonds, stocks, and currencies has been volatile but lacks a clear direction. This is mainly due to the cooling expectations of interest rate cuts while the expectation of the "Fed Put" remains unchanged. In terms of short-term positioning, the following factors can be considered.

The U.S. 10-year Treasury bond (also known as the risk-free rate)

The U.S. 10-year Treasury yield has recently fallen to around 4%. Although the rate-cutting cycle has begun, concerns related to the U.S. fiscal deficit are unlikely to dissipate entirely, and Treasury yields are likely to remain at current levels in the short term. As long as there are no sudden black swan events in the market, the overall downward trend should remain intact. For short-term traders, as long as the 10-year U.S. Treasury yield stays approximately between 4% and 4.2% (or 4% to 4.1% in the very short term), the overall market is expected to remain relatively stable.

Russell 2000

Over the past three months, $Russell 2000 Index(.RUT.US)$ the Russell 2000 has outperformed the three major traditional U.S. stock indices, primarily because small-cap stocks benefit more from rate cut expectations. The Russell 2000 has also shown a 'bullish alignment' pattern on its moving averages. However, after reaching a high of 2453 points yesterday, the index pulled back, indicating that small-cap stocks are beginning to face pressure at higher levels. If short-term capital continues to flow out of small-cap stocks and into large-cap stocks, it would reflect a healthier market condition, reducing concerns about market bubble risks.

However, this does not mean that speculative trading will completely disappear. AI-related themes remain a market focus, such as computing power, applications, or derivative sectors like energy, cooling solutions, and quantum computing. These could continue to be major market themes. For these types of stocks, technical analysis based on the latest market news and sentiment can be applied for trading decisions.

As for large-cap stocks, some streaming platform stocks are worth watching. A common feature among them is their stable active user base, low sensitivity to economic fluctuations, and strong operating cash flows. For example, $Netflix(NFLX.US)$ or $Spotify Technology(SPOT.US)$ can serve as examples. Investors may watch whether these stocks experience technical breakouts in the short term.

S&P 500 Index or Nasdaq 100 Index

Although the Federal Reserve has maintained a relatively hawkish stance on monetary policy, combined with the "Fed Put" perspective following the press conference after the interest rate meeting, the current outlook for U.S. stocks is cautiously optimistic. The slowdown in upward momentum is likely due to high valuations, but the overall uptrend and trajectory should remain intact. Additionally, both indices have issued bullish "golden cross" signals earlier. As long as no death crosses occur in the short term, there is justification to continue favoring an upward trend.

ETFs tracking these major indices are also a good choice for conservative investors, such as those tracking the S&P 500 Index $SPDR S&P 500 ETF(SPY.US)$ or $Vanguard S&P 500 ETF(VOO.US)$ and those tracking $NASDAQ 100 Index(.NDX.US)$ 's $Invesco QQQ Trust(QQQ.US)$ . Although the upward momentum will likely slow, considering that implied volatility remains at relatively low levels, investors can incorporate commonly used options strategies. For instance, using a covered call strategy with the aforementioned ETF investments—buying 100 shares and selling one call option—can generate additional income through premiums to enhance returns.

Furthermore, certain options strategies can be employed to generate income. To avoid the significant risks and high margin costs associated with selling options to collect premiums, investors may consider using Vertical Spread strategies. These involve selling spreads across different strike prices to generate income while mitigating potential substantial losses if the market moves against their position.

The Vertical Spread strategy involves simultaneously buying and selling options with the same expiration date but different strike prices, whether calls or puts. Investors must first determine the direction of the asset price movement before making a decision.

Bull Put Spread is a strategy used when the outlook is positive. By trading put options (Put), investors sell puts with higher strike prices and buy puts with lower strike prices, profiting from the difference between the two.

A strategy for bearish outlooks: Bear Call Spread. This involves trading call options by selling a call option with a higher strike price and buying a call option with a lower strike price, thereby capturing the difference in premiums.