Core Viewpoint - The Federal Reserve's decision to lower the federal funds rate by 25 basis points to a target range of 4.00% to 4.25% was anticipated, but the market reaction was unexpected, with the dollar index and U.S. Treasury yields rising sharply after a brief dip, while gold experienced significant selling pressure [1][3]. Group 1: Economic Indicators and Fed's Actions - Fed Chairman Powell labeled the rate cut as a "risk management" move, indicating that the motivation was not due to an existing recession but rather to hedge against future uncertainties [3][5]. - Despite the rate cut, Powell acknowledged rising risks in the labor market, with both labor supply and hiring demand declining sharply, creating a "peculiar balance" [5]. - Inflation and unemployment rates, which typically move in opposite directions, have both shown upward trends recently, complicating the Fed's decision-making process [5][8]. Group 2: Fed's Forecasts and Political Pressures - On the same day as the rate cut, the Fed raised its GDP growth forecasts for the next three years while lowering unemployment rate predictions for the next two years, highlighting internal contradictions in its outlook [7][8]. - Political pressure from the White House is increasingly influencing Fed decisions, as evidenced by the dissenting vote from newly appointed board member Milan, who advocated for a more aggressive 50 basis point cut [10][12]. - The market's trust in the Fed's independence is eroding, with concerns that the Fed's future policy may lean more towards government preferences due to ongoing political pressures [14][15]. Group 3: Market Reactions and Liquidity Concerns - The market has accepted predictions of one to two more rate cuts this year, but largely ignored the Fed's long-term projections, reflecting skepticism about the Fed's future policy direction [17]. - A more pressing concern is the tightening liquidity in the banking system, as indicated by the overnight financing rates in the repo market exceeding the Fed's policy rate ceiling, signaling potential financial instability [20][22]. - The ongoing reduction of the Fed's balance sheet is drawing liquidity from the market, which could lead to a situation where the Fed may need to reverse course and expand its balance sheet again, signaling a stronger easing than the rate cut itself [22][24].