The market is increasingly uncertain about the Federal Reserve’s (Fed) decisions from day to day. A Bloomberg poll indicates a movement of 25 basis points downward. The pricing of Fed Funds Futures contracts suggests that the implied chance of a cut at the 50 basis point level is close to 70 percent. This strong market expectation for a more aggressive move, which has developed over the last few days, is not due to either new macro publications or statements by Fed representatives (where we are in a blackout period). This is merely pure speculation that may have simply gone too far. Everything will be verified today.
In my opinion, the Fed will only want to emphasize the start of an easing cycle today, hence opting for a change of 25 basis points. If it lowers the rates more, this could signal to the market that it is seriously concerned about the economy. The market may then speculate about a potential recession. Such an interpretation would not play into the hands of the Federal Reserve. As has been suggested by numerous remarks from Powell and other representatives, the central bank does not believe that the economic situation is close to a recession. Obviously, at the same time, the Fed has started to pay more attention to the labour market to avoid missing the moment for an appropriate response. A stronger initial move could create additional pressure on the central bank to opt for an aggressive series of cuts. Powell certainly wants to retain flexibility in the coming months to respond appropriately to the economic developments. A move of 25 basis points does not imply that in November or December the Fed will also act cautiously. I believe that if the data for September and October is really poor (a labour market crash), then in November and December we could see stronger cuts, which would then be fully justified.
What could be surprising today? Given the expectation for a 50 basis point move, one could conclude that a half-smaller change could be a bigger surprise and somewhat of a disappointment. If so, the dollar could appreciate, considering the losses it suffered recently. This would bring the EUR/USD rate below 1.11, and perhaps even below 1.10.
There will be a number of issues to consider. The decision alone is not everything. The change in the dot plot will be crucial. The Federal Fund rate median was 5.125 percent at the end of 2024, 4.125 percent at the end of 2025, and 3.125 percent at the end of 2026. The market reaction will depend on how the actual plot differs from the one at the beginning of the holiday. Of course, this is not everything. Powell’s statements will be examined to see how concerned the Fed’s chairman is about the economic situation. If the market does not find such concerns, this should favour the dollar.
By Łukasz Zembik, Oanda TMS Brokers.
Source: https://ceo.com.pl/rynki-w-napieciu-przed-decyzja-fed-spekulacje-o-cieciu-stop-o-50-pb-moga-rozczarowac-inwestorow-40001
