FOMC Ahead: 'Irrational Exuberance' 2.0?

Wall Street Awaits the FOMC Decision

Wall Street investors are currently bracing for one of the most anticipated, yet uncertain, Federal Open Market Committee (FOMC) meetings in a long time. This particular meeting has generated significant interest due to several factors that make it unique. President Trump and his administration have been pushing for lower interest rates, while the economy shows mixed signals with slightly higher inflation and strong GDP growth. Below are five key points to consider before the upcoming FOMC meeting.

Will the Fed Cut by 25-bps or 50-bps?

The Fed’s mandate is to achieve maximum employment and stable prices, with a long-term goal of 2% inflation. Although the Fed has not met its inflation target, recent developments suggest a rate cut is likely.

• Jerome Powell has indicated openness to a more flexible inflation-targeting framework.
• The Bureau of Labor Statistics released significant negative job revisions, showing job growth was much lower than previously estimated. This weakens the economic outlook and supports calls for lower rates.

While some investors are debating whether the Fed will cut by 25 or 50 basis points, a 25-bps cut is the most probable outcome. Tools like the CME FedWatch Tool and betting platforms like PolyMarket show high odds for a 25-bps cut, reinforcing this expectation.

FOMC: Expect Volatility

Investors should be prepared for increased market volatility around the FOMC meeting. Historically, these meetings tend to be more volatile than regular trading days, with average swings of about 1%. In addition, the monthly options expiration (OPEX) on Friday could further amplify price movements as market makers adjust their positions.

Pre-Fed Price Action & September Seasonality

FOMC meetings often mark turning points in equity markets. Currently, the Nasdaq 100 Index has seen ten consecutive daily gains, indicating strong momentum. However, investors may look to sell the news after the meeting, potentially leading to short-term corrections.

Historical data also suggests that late September is typically a weaker period for stocks. While September often ends positively, pullbacks during this time can set up for a strong year-end rally.

Interest Rate Cuts Near New Market Highs are Bullish

Looking at the long-term picture, rate cuts near all-time highs have historically been powerful. The Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high, and in each case, the market was higher a year later with a median return of 15%.

A potential precedent is the 1996 market environment, where a rate cut led to a 22% advance over the next year. If the current market rallies, AI-related stocks such as CoreWeave, Nebius Group, Oracle, Nvidia, and Microsoft are likely to lead the charge.

Market Sentiment & Momentum

Despite the strong gains in 2025, investor sentiment remains cautious. According to the AAII Sentiment Survey, more investors are bearish than bullish, which could signal a contrarian buying opportunity.

On the other hand, market momentum indicators suggest that the rally might be just beginning. Since 1975, there have been only six instances where the S&P 500 rose 30% or more in five months. In every case, the index ended higher in the following six and twelve months, with an average gain of 18.1% over twelve months.

Bottom Line

No matter the outcome of Wednesday’s meeting, it is shaping up to be one of the most pivotal FOMC decisions in recent memory. While a 25-bps cut appears likely, the potential for market volatility remains high. Investors should stay alert and prepared for possible fluctuations as the market reacts to the Fed's decision.