Nobody expects the drama which may take place after the Fed's "Sure Thing" Rate Cut
The smart money knows the real risk isn't the Fed's decision, it's what happens when everyone's betting on the same outcome.
While a 95% probability of a 25 basis point rate cut seems like a lock for today’s Federal Reserve meeting, here’s what Wall Street isn't telling you: sometimes the most dangerous trades are the ones everyone agrees on. Even as the Fed prepares to cut rates, longer-term borrowing costs could actually rise. Just ask anyone trying to get a mortgage in the UK after their recent rate cuts.
The VIX has fallen to 15.69, showing dangerous complacency ahead of what could be a market-moving decision, it’s time to pay attention to what the crowd is missing.
As a highly-trained portfolio manager who’s spent years reading market tea leaves, I can tell you that the setup heading into today’s FOMC meeting screams classic “sell the news” territory. The question isn’t whether the Fed will cut; it’s whether markets are prepared for what comes next.
The Market’s Overwhelming Consensus
The numbers paint a clear picture of extreme confidence:
- 96% probability of a 25 basis point cut (4.25-4.50% down to 4.00-4.25%)
- Three total cuts expected in 2025: September, October, and December
- S&P 500 up about 2% since September 8th, grinding to 6,606 at the close yesterday.
- Institutional positioning suggests “inevitable” rate cut rally expectations
But here’s the twist: rate cuts don’t always translate to lower borrowing costs across the economy. The yield curve has a mind of its own, and longer-term rates often move independently of Fed policy, sometimes in the opposite direction entirely.
This is exactly what happened 1 year ago when the fed cut rates 50 bps in September of 2024. Treasury yields and subsequent mortgage rates went higher, despite three rates cuts to finish out the year.
The Hidden Risks Everyone’s Ignoring
Here’s what separates professional traders from the crowd: understanding that the cut itself is just the opening act. The real drama begins when focus shifts to the dot plot and Powell’s comments.
Technical Warning Signs:
- Steady daily uptrend creates classic “sell the news” vulnerability
- Below-average volume (under 3 billion shares) signals smart money stepping aside
- VIX at 15.69 shows dangerous complacency before a major event
Positioning Imbalances:
- Bullish sentiment concentrated in financials and tech
- Bearish calls emerging on retail stocks (consumer spending concerns)
- Market picking winners before the Fed even speaks
The Small-Cap Litmus Test: Here’s a key indicator most are overlooking: small-cap stocks are sitting at a critical resistance level. The Russell 2000 has been underperforming for months, but rate cuts typically benefit smaller companies more than large caps due to their higher debt loads and sensitivity to borrowing costs. If small caps can break out on the Fed news, it could signal genuine risk-on sentiment and validate the rate cut rally. But if they fail at resistance despite easier policy, that’s a major warning sign that something deeper is wrong with the economic narrative.
The Rates Paradox: Even with Fed cuts coming, longer-term rates could surprise higher. We’ve seen this in other countries where central bank cuts didn’t translate to lower borrowing costs for consumers and businesses. In the UK, 10 yr GILT rates and mortgage rates are climbing despite cuts to the key Bank Rate.
Three Scenarios and Key Technical Levels
25 Basis Point Rate Cut (95% probability):
- Initially muted reaction since it’s priced in
- Real action starts with Powell’s press conference
- Key levels: Support at 6,580, resistance at 6,650
- Hawkish tone could break support despite the cut
50 Basis Point Cut (5% chance):
- Strong initial rally toward 6,700-6,750
- Risk: Markets might interpret this as the Fed seeing economic weakness
- Sometimes getting what you wish for isn’t what you want
No Cut (shock scenario):
- Significant selloff testing 6,340-6,360 support.
- Failure at 6,340 would put 6170 in play.
- VIX would most likely spike from current 15.69 level
- Extreme positioning makes this particularly dangerous
Time to Rebalance Before the Storm
Much of the recent rally has been fueled by easier policy expectations. When everyone's leaning the same direction, that’s when the boat tips over.
Action Items for Smart Investors:
- Rebalance risk exposure before volatility returns
- Rotate into out-of-favor assets not dependent on momentum trades
- Don't chase yesterday's winners when tomorrow’s market is shifting
A Fed rate cut risks pouring fuel on the demand fire, potentially reigniting inflation, but deregulation can open the supply floodgates. Cut the cost of money, cut the cost of red tape and suddenly growth doesn’t have to mean runaway inflation.
I believe that his is the sweet spot policymakers are chasing.
The Fed meeting isn’t the end of the story. It’s the beginning of a new chapter where complacency gets punished and preparation gets rewarded.
Follow me for the technical insights that cut through the Wall Street noise and keep you ahead of the crowd. Because in markets, what “everyone knows” is often exactly what gets you hurt.
