Fed meeting preview
Below, we point out the key things to remember ahead of tonight’s FOMC meeting. There is also a link to our latest video on the Fed and what traders should expect.
- The meeting decision is at 7pm BST, the press conference with Jerome Powell starts at 7.30pm BST and usually lasts an hour.
- The market is currently pricing in a 61% chance of a 50bp rate cut this evening, last week this was 30%.
- We think that the Fed will cut rates by 50bp, although economists surveyed by Bloomberg expect only a 25bp move. However, the bigger market reaction will be to the latest FOMC inflation and growth projections, the Dot Plot and what Powell says about the frequency of rate cuts going forward.
- The market already expects 10 rate cuts from the Fed in the next year, so it’s hard to see the Fed signaling that more rate cuts than what is currently priced in will be necessary. This could be bearish for Treasuries.
- It also increases the chance of a ‘hawkish’ surprise.
- The Fed may justify a 50bp rate cut as a precautionary measure to reduce the chances of a recession, even though there are still signs of service price inflation in the US economy. A 50bp rate cut could extend the economic cycle, which may be good for stocks and bad for bonds in the short term. It could also boost the dollar, which has fallen more than 5% since July.
- The FOMC’s Dot Plot will also be important. There is a chance that the Fed suggests that they are front-loading rate cuts, before pausing. In this scenario we could see the Fed’s expectations for the terminal rate rise. This would be a ‘hawkish’ surprise, which would be negative for global risk sentiment and stock markets.
- A 25bp rate cut would be a ‘hawkish’ move from the Fed. It would be bearish for risk sentiment and bullish for the dollar, especially vs. sterling, which is the best performing G10 currency vs. the USD so far this year and is up by more than 3%. It could also boost USD/JPY back towards 145.00.
See our latest video on how markets could react to tonight's meeting.
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