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tonight, u.s. monetary policy is about to reach a watershed moment.

the federal reserve is about to start cutting interest rates, and the world's largest economy will gradually break free from the shackles of long-term high borrowing costs.

but in the past few trading days, the market has been divided on the extent of the fed's interest rate cut. in particular, the downward trading of us treasury bond interest rates has entered an inexplicable frenzy, and the whole world seems to be "forcing the palace" on the fed, expecting a 50 basis point rate cut at tonight's fomc meeting, instead of the previously expected 25 basis points.

the market is worried that if the fed cuts interest rates by 25 basis points, traders who made record bets will face huge losses, triggering market fluctuations; if the interest rate is cut by 50 basis points, the fed will be in a passive position in subsequent interest rate decisions and will not be able to rescue the market when necessary.

seema shah, chief global strategist at principal asset management, said: "for the fed, the key is to decide which risk is greater - if the interest rate is cut by 50 basis points, it will reignite inflationary pressures, and if the interest rate is only cut by 25 basis points, it may trigger a recession. criticized for responding too slowly to the inflation crisis, the fed may take a reactive approach to the risk of recession rather than a proactive one."

the federal reserve is now caught in a dilemma and is having a hard time.

"forcing the federal reserve"

recent media reports indicate that the federal reserve will take more radical actions.

bill dudley, former third-in-command of the federal reserve and former president of the new york federal reserve, believes that there is sufficient reason to cut interest rates by 50 basis points this time. even more exaggerated is that three democratic senators in the united states, elizabeth warren, sheldon whitehouse and john hickenlooper, urged the federal reserve to cut interest rates by 75 basis points in september in a letter to powell on monday.

encouraged by these people, the interest rate market priced in a probability of a 50 basis point rate cut in september that was close to 70%.

a large number of market participants are also betting on a 50 basis point cut by the federal reserve. data compiled by bloomberg shows that in the october federal funds futures that investors use to bet on wednesday's decision, trading activity has surged to the highest level since the contract was launched in 1988, with most bets being placed on a 50 basis point rate cut by the federal reserve. data shows that related positions have surged since this week.

meanwhile, benchmark u.s. treasuries have risen sharply recently, pushing yields tumbling; the 2-year yield hit a two-year low of 3.52% this week.

the new fed news agency is swinging left and right

nick timiraos, a well-known financial journalist known as the "new fed news agency", was vague in his statement. his latest article pointed out that the fed is about to cut interest rates, but the extent of the first cut remains in doubt.

he believes that whether the fed will cut the benchmark interest rate by a larger 50 basis points or the traditional 25 basis points will depend on how fed chairman powell and his colleagues lead the choice among a series of delicate considerations.

typically, fed officials tend to raise or cut rates in 25 basis point increments to study the impact of those moves, but they will move faster when they believe their rate stance is inconsistent with the balance of risks.

combined with timiraos' previous wavering statements, it may imply that there are large differences within the federal reserve on the extent of the september interest rate cut, adding suspense to the federal reserve's interest rate meeting tonight.

the highlight is powell's statement

the federal reserve will announce its interest rate decision at 2:00 a.m. beijing time on thursday, and federal reserve chairman powell will hold a press conference at 2:30 a.m.

the fed's interest rate statement 30 minutes before the press conference is the best way to read the decision-makers' judgment. the market will focus on: whether there are dissenting votes, the decision-makers' description of inflation and its outlook, their views and outlook on the labor market, and hints on the future interest rate path.

if the rate cut is 25 basis points, those who believe that labor market dangers are building will want powell to signal that policymakers are ready to act more decisively if necessary. at this point, powell would also be free to say that his goal is to prevent the job market from deteriorating further.

“the message will be: we wish we had more ammunition left, but we’re not going to use it today,” said ellen meade, a former senior adviser for policy and communications at the federal reserve and now a research professor at duke university.

david wilcox, who has advised three fed chairmen and now leads u.s. economics research at bloomberg economics, said powell himself would likely want to keep his options open at future meetings, regardless of how big the first cut is.

at the fed’s annual symposium in jackson hole, wyoming, in august, several policymakers laid out the case for a “gradual” or “methodical” approach to rate cuts, but powell was notable for not joining the chorus and endorsing the argument.

the market may react strongly

thirty years ago, bonds and stocks rallied ahead of key federal reserve policy meetings, just as they do today.

bloomberg's analysis of market performance during six fed policy easing cycles since 1989 found that the s&p 500, u.s. treasuries and gold typically rise when the fed starts cutting interest rates. in the six months after the fed starts cutting interest rates, the s&p 500 rose an average of 13%, with the exception of the recessions in 2001 and 2007.

short-term u.s. treasuries typically outperform longer-term bonds, causing the yield curve to steepen; six months after the first rate cut, the difference between 10-year and 2-year treasury yields widened by an average of 44 basis points; in four of the past six cycles, gold has delivered returns to investors, while the dollar and oil have risen and fallen.

with market implied probabilities suggesting a slightly higher than 50% chance that the fed will cut rates by half a percentage point on wednesday, subadra rajappa, head of u.s. rates strategy at societe generale, said the market reaction would be much stronger if it were a 25 basis point cut.

in addition to the market's "forcing the palace", the november election also poses a severe test to the federal reserve's decision-making.