Why Do Inflation Data Trigger Rate Cut Bets? The Truth Behind the Federal Reserve's Independence and Market Dynamics

On the surface, the release of inflation data triggered a sharp rise in short-term interest rate futures and led traders to increase bets on rate cuts. This logic may seem counterintuitive. However, a closer look reveals that this reflects the political pressure faced by the Federal Reserve, market expectations for the economic outlook, and Wall Street’s complex calculations for 2026.

The seemingly contradictory market logic

Typically, better inflation data should support rate cuts, which is understandable. But the real reason traders are increasing their bets on rate cuts is not just the inflation data itself, but a more complex combination:

According to the latest news, Federal Reserve Chair Jerome Powell is facing a criminal investigation by the Department of Justice related to the Federal Reserve headquarters renovation project (a $2.5 billion budget that has overshot by $700 million). This incident has raised concerns about the Fed’s independence. Meanwhile, signs of cooling in the labor market provide an economic basis for the Fed’s rate cut policy.

From the traders’ perspective, their bets are not solely on inflation easing, but on a combined expectation of rate cuts driven by inflation decline, cooling employment, and political pressure.

Wall Street’s “triple positive” expectation

According to the latest news, Wall Street strategists generally believe that the U.S. economy and stock market will experience a rare confluence of multiple positive factors in 2026. This framework is crucial for understanding current market sentiment:

This combination of expectations explains why market enthusiasm for rate cuts is so high — it’s not just about simple rate cuts, but a resonance of rate cuts, fiscal stimulus, and technological progress.

Political risks become a new variable

However, this optimistic outlook faces a major variable: the independence of the Federal Reserve is under threat.

According to related reports, after news of Powell facing a criminal investigation was released, Bitcoin prices quickly rebounded to around $92,000, and Ethereum approached $3,200. This reflects market expectations that, under political pressure, the Fed may tilt its policies — if the Fed accelerates rate cuts under political pressure, asset prices could be pushed higher.

Saul Eslake, former chief economist at Bank of America Merrill Lynch Australia, pointed out that Trump’s administration has continued to attack the Fed’s independence, leading to short-term interest rates falling while long-term bond yields are rising. This distorted yield curve reflects market concerns about future policy uncertainty.

Diverging voices in the market

Despite the mainstream Wall Street view favoring the “triple positive,” there are also differing opinions:

Bill Ackman, CEO of Pershing Square Capital Management, said the Fed might abandon its 2% inflation target and instead set an inflation range of 2.5%-3%. This means that even if inflation falls to 2.7%, the Fed might not be as aggressive in cutting rates as the market expects.

Analysts also have differing views on the technical outlook for cryptocurrencies. Some believe Ethereum has held key resistance levels, but others point out that Bitcoin’s structure remains weak, with no “credible” signs of bottoming. This reflects differing judgments among market participants about policy directions.

Key points to watch

From a personal analysis perspective, the current market bets on rate cuts may be overly optimistic for three reasons:

First, the potential threat to Fed independence could lead to mixed policy signals, making it difficult for the market to accurately predict. Second, the divergence between rising long-term bond yields and falling short-term rates reflects concerns about long-term inflation. Third, the involvement of political factors makes traditional economic data analysis less reliable.

Summary

The enthusiasm for rate cuts sparked by inflation data appears simple but is actually complex. Behind it are rational assessments of economic fundamentals (inflation easing, cooling employment), expectations of political environment adjustments (potential threats to Fed independence accelerating rate cuts), and optimism about the “triple positive” in 2026.

However, the market should also be aware that this optimistic outlook faces multiple risks: the Fed may adjust its inflation target, political pressure could distort policies, and rising long-term yields reflect long-term inflation concerns. Monitoring the Fed’s actual policy actions, inflation trends, and political developments over the coming months will be key to understanding market direction.