Fed Cuts in Focus: Why AI Prompting Matters More Than Forecasts

This Week’s Focus: Turning Fed Watching Into Action

The Federal Reserve (Fed) meets on September 16 and 17, and markets are almost certain an interest rate cut is coming. According to the CME FedWatch Tool, as of September 15, the probability of a 25 basis point (bp) cut stands over at 95%, with only slim odds of a larger 50bp move.

JPMorgan cautions that even a well-telegraphed cut could spark a “sell the news” pullback in equities, while Standard Chartered points to weak August jobs data and a four-year high in unemployment as reasons the Fed might consider a deeper move.

The base case is clear, but the real market risk lies in surprises. A 50bp cut would lift bonds and rate-sensitive assets but also raise questions about the Fed’s confidence in the economy. On the other hand, a pause or hawkish tone, though unlikely, would shock equities and strengthen the dollar.

This is where robust AI prompting proves its worth. Instead of guessing, you can frame structured prompts that help decode Fed language, build scenarios and translate outcomes into stock and exchange-traded fund (ETF) positioning. Effective AI prompting helps you move from uncertainty to clarity.

AI in Action: Practical Prompt Frameworks for Central Bank Analysis

To avoid vague or potentially unusable results, in each prompt, consider assigning a role (such as “retail investor,” “portfolio manager” or “quantitative analyst”), requesting credible references (citations), specifying the output format (bullet points, tables, etc.) and defining precise outputs (number of words, concise summaries).

📌 Prompt 1: Parsing Fed Language

Goal: Spot shifts in tone between two recent FOMC statements, which you can use following the meeting on September 16-17.

You are a macroeconomist analyzing central bank actions. Compare the July 2025 and September 2025 Federal Open Market Committee (FOMC) statements in the US.  

Highlight differences in tone around inflation, growth and labor markets.  

Structure the output in a 3-column table:  
1. Policy Area  
2. July 2025 wording  
3. September 2025 wording and plain-language interpretation of the shift. 

📌 Prompt 2: Scenario Building (Cut, Bigger Cut, Pause)

Goal: Map out market outcomes for all realistic Fed paths.

Act as a macro strategist. Create three scenarios for the September 2025 Fed decision regarding interest rates in the US:  
1. 25 basis point (bp) cut (base case, ~95% probability);  
2. 50bp cut (dovish surprise).  
3. Hold (hawkish surprise).  

For each, provide:  
- Expected Fed language and rationale;  
- Market impact (bonds, US equities as represented by the S&P 500 index, US dollar);  
- Investor positioning (short vs. long-term).  
Present results in a 3-column scenario matrix table.

📌 Prompt 3: Portfolio Stress Testing

Goal: Assess portfolio risks under Fed outcomes.

You are a portfolio risk manager.  

Stress-test a 60/40 portfolio (60% US equities, 40% Treasuries) under three scenarios for the September 2025 Federal Reserve (Fed) decision:  
1. 25 basis point (bp) cut (base case, ~95% probability);  
2. 50bp cut (dovish surprise);  
3. Hold (hawkish surprise).  

For each scenario, show:  
- Estimated portfolio return (1–3 months);  
- Key risks (credit spreads, volatility, US dollar strength);  
- Suggested hedges or adjustments.  

Keep the output concise and present results in a risk assessment table.

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ETF Spotlight: ETF Positioning Around the Fed  

The upcoming Fed decision does not just shape interest rates. It ripples through bonds, equities, real estate and currencies. These asset classes can all be accessed through ETFs. Thus, AI prompting can help you translate policy outcomes into positioning, whether it’s preparing for the base case or hedging against surprises.

Key ETFs to Watch:

• The iShares 20+ Year Treasury Bond ETF (TLT): Most sensitive to rate cuts, as yields fall and long-duration Treasuries rally.

• Invesco Nasdaq 100 ETF (QQQ): Growth stocks will likely benefit from easing, but stretched positioning makes tech vulnerable to pullbacks.

• Vanguard Real Estate ETF (VNQ): Lower borrowing costs support REIT valuations, though equities may face “sell the news” risk.

• Invesco DB US Dollar Index Bullish Fund (UUP): A hold or hawkish tone would likely lift the US dollar, making UUP a defensive hedge. 

📌 Prompt 4: ETF Reaction Mapping

Goal: Show how key ETFs react under different Fed outcomes.

You are an ETF strategist.  

Analyze how TLT, VNQ, QQQ, and UUP exchange-traded funds (ETFs) are likely to react under three Federal Reserve (Fed) interest rate scenarios following the Fed meeting of September 16 and 17.:  
1. 25 basis point (bp) cut (base case);
2. 50 bp cut (dovish surprise);
3. Hawkish surprise.

For each ETF, provide:  
- Directional move (up, down, flat); 
- Key drivers (yields, valuations, US dollar strength); 
- Suggested allocation level (low, medium, high).

Present results in a clear table: rows = ETFs, columns = Fed outcomes.

Moving Forward

The Fed’s September 17 meeting is likely to deliver a rate cut, but the market reaction may be less predictable. By using prompts to analyze language shifts, stress-test portfolios and map ETF positioning, investors can prepare both ahead of the decision and in its aftermath. The real edge comes not from the forecast, but from the ability to adapt as the narrative unfolds.

Thank you for reading AI in Investment Research & Finance. Here’s to spotting tomorrow’s market stories today.

Until next time