Global markets opened an action-packed week with equities close to record highs and the dollar holding steady as traders prepared for what is widely expected to be the first cut in the U.S. policy rate in months. Futures markets are pricing a quarter-point reduction that would lower the federal funds rate target to 4.00–4.25 percent, leaving only a roughly 4 percent chance of a larger, 50-basis-point move, according to market-implied probabilities.

The focus will be the Federal Reserve's updated projections — the so-called "dot plot" — and Chair Jerome Powell's subsequent press conference, where investors hope to learn whether this cut marks the start of a steady easing cycle or a more cautious, data-dependent approach. Reuters summed up market sentiment by noting that "anything less than dovish will disappoint investors," reflecting how heavily expectations have tilted toward easier policy.

Price action ahead of the Fed showed investors rewarding risk assets. Major global equity indices were trading near multiyear highs, supported by expectations of lower borrowing costs and a resilient corporate earnings backdrop. Fixed-income markets priced in roughly 125 basis points of cumulative cuts by late 2026, a level that would materially lower neutral real rates over the medium term if realized. That forward curve has compressed term premia and pushed down yields on longer-dated Treasuries relative to recent peaks, though volatility remains tied to shifts in inflation readings and labor market strength.

Policy moves beyond the United States will test the coherence of global monetary conditions. The Bank of Canada is expected to cut by 25 basis points this week, a move that would align Canadian policy with the easing narrative and weigh on the Canadian dollar. By contrast, the Bank of Japan and the Bank of England are widely expected to hold rates steady, underscoring growing divergence in central-bank timing and creating potential cross-currency volatility as markets adjust expectations.

For markets, the risk is clear: pricing already incorporates substantial easing. If the Fed signals a gradual approach or higher-for-longer language than investors hope, equities and reflation-sensitive assets could face sharp re-pricing. Conversely, a markedly dovish Fed could extend the rally but further compress risk premia, raising concerns about stretched valuations and reduced buffers against future shocks.

Longer-term implications hinge on whether inflation continues to trend toward central-bank targets and whether labor markets ease sustainably. A sequence of cuts that materially lowers real rates would support sectors tied to growth and borrowing, but could also stoke asset-price inflation and lessen incentives for fiscal consolidation in some economies.

In the immediate term, traders will parse Powell's tone, the new dot plot, and the Bank of Canada's decision for guidance. Those data points will determine whether the current calm gives way to a more volatile reconciliation between markets' aggressive easing bets and central banks' caution.