The Feds biggest interest rate call in years happens Wednesday. Here’s what to expect,
Despite all the hoopla surrounding them, Federal Reserve meetings are typically quite routine events. Markets respond, policymakers signal their intentions in advance, and everyone knows, at least roughly, what will happen.
Not at this moment.
The Federal Open Market Committee meeting of the central bank this week has an unusual sense of uncertainty about it. Although the markets are unanimous in their belief that the Fed will cut interest rates, there is a heated discussion about how far officials will go.
Will the Fed reduce rates by the customary quarter of a percentage point, or 25 basis points, or will it take an aggressive first step and reduce rates by half a point, or 50 basis points?
Fed observers are uncertain, which could lead to an even more consequential FOMC meeting than normal. The Fed’s rate decision will be made public at 2:00 p.m. ET on Wednesday afternoon when the meeting comes to an end.
“I think they’ll trim 25 basis points, but I hope they trim 50. “I think rates are just too high, so my hope is 50,” Moody’s Analytics chief economist Mark Zandi stated. “They met their goals of full employment and inflation returning to target, which is incompatible with a funds rate target of about 5.5 percent.” Thus, I believe they must quickly return to normal rates and have ample space to do so.
The futures market has seen unstable pricing in relation to the Fed’s actions.
Trader consensus had been on a 25-basis-point decrease until late last week. Then, on Friday, opinions abruptly changed, raising a half-point. Fed funds futures traders were putting in a roughly 63% possibility of the larger move as of Wednesday afternoon, which is a rather low level of conviction compared to prior meetings. 0.01% is equivalent to one basis point.
Wall Street pundits persisted in predicting that the Fed would take a more cautious approach initially.
“Easing should be viewed with just as much uncertainty as tightening, although it seemed to work, didn’t work exactly how they thought it was going to,” stated Tom Simons, a U.S. economist at Jefferies. Therefore, don’t haste if you’re unsure.
With a more dovish stance, Zandi stated, “They should move quickly here.” “They run the risk of something breaking if they don’t.”
Inside the FOMC meeting room, officials who have typically voted in unison should be divided in an unusual way during the argument.
Robert Kaplan, the former president of the Dallas Fed, said to CNBC on Tuesday, “I think they’re split.” Some people at the table will share my sentiment that they’re running a little behind schedule and would rather not waste the fall trying to catch up with the economy. Others may simply want to exercise greater caution from a risk management perspective.
This will be an intense Fed meeting with lots of action beyond the 25 vs. 50 issue. Below is a summary of what’s available:
The rate of delay
The FOMC has maintained its benchmark fed funds rate between 5.25% and 5.5% since its most recent rise in July 2023.
It has remained there despite the Fed’s favored inflation metric decreasing from 3.3% to 2.5% and the unemployment rate increasing from 3.5% to 4.2% over the past 23 years. That is the highest it has been.
Chair Jerome Powell and the other officials have made it very clear in recent weeks that this meeting will see a cut. The amount will depend on how much has to be calculated in order to combat inflation and keep in mind that the labor market has slowed down significantly over the past few months.
Seema Shah, chief global strategist at Principal Asset Management, stated in a written post that “for the Fed, it comes down to deciding which is a more significant risk — reigniting inflation pressures if they cut by 50 bps, or threatening recession if they cut by just 25 bps.” “The Fed will probably be cautious about being reactive, rather than proactive, to the risk of recession, having already been chastised for reacting to the inflation crisis too slowly.”
The “plot of dots”
It’s possible that the signals meeting attendees send about where they think rates will go from here will be just as significant as the rate cut.
The “dot plot,” a grid in which each official indicates how they envision events developing over the next few years, will be used to achieve that. The first forecast for 2027 will be provided in the September plot.
Members of the FOMC projected only one rate reduction until the end of the year in June. With just three meetings remaining, markets are pricing in the equivalent of up to five cuts, or 1.25 percentage points, assuming 25 basis point changes. This is very certain to escalate.
Overall, traders anticipate that the Fed will continue to cut rates in 2019. The CME Group’s FedWatch index of futures contracts shows that the Fed will remove 2.5 percentage points from the current overnight borrowing rate before halting.
Regarding the market’s prognosis, Zandi remarked, “That feels overly aggressive, unless you know the economy is going to start to weaken more significantly.” This week’s meeting is one of the three that Moody’s anticipates to have quarter-point cuts.
Economic Projections
The FOMC’s Summary of Economic Projections, which also includes unofficial projections for inflation, the gross domestic product, and unemployment, includes the dot plot.
The committee will very definitely increase unemployment from the 4.0% end-of-year prediction in June, which will be the largest revision for the SEP. At present, the unemployment rate is 4.2%.
Since core inflation last stood at 2.6% in July, it is expected to be lowered lower from its June estimate of 2.8% for the entire year.
The FOMC’s June predictions for inflation appear to be undershot, and the higher inflation readings at the beginning of the year are starting to resemble residual seasonality rather than reacceleration. Thus, a shift in attention to labor market vulnerabilities will be a major feature of the conference, according to a report from Goldman Sachs economists.
Powell’s press conference and the statement
The committee will need to make changes to the dot plot, SEP, and post-meeting statement in order to account for the anticipated rate reduction and any further forward guidance the committee decides to include.
The market will respond to the release of the SEP and the statement at 2:00 p.m. ET, with the Powell news conference at 2:30.
In order to sound more confident about inflation, present the risks to employment and inflation as more balanced, and reaffirm its commitment to achieving maximum employment, Goldman predicts that the FOMC “will likely revise its statement.”
The economist at Jefferies, Simons, stated, “I don’t think that they’re going to be particularly specific about any kind of forward guidance.” “At this stage of the cycle, forward guidance is not very helpful because the Fed is unsure of its course of action.”