Fed Chairman Jay Powell has made good so far on his promise to cut interest rates 3 times, each 25 bps, as part of a “midcycle adjustment”. And heading into today’s FOMC rate decision meeting, markets have no reason to believe that he will change his tune any time soon. As transparent as the Fed has been during the midcycle adjustment (and the during last decade overall), there is no reason for us to believe that this time will be different. According to the CME FedWatch Tool, markets are pricing in a 98% chance that the Fed will leave rates unchanged.
Source: City Index
Even though the interest rate decision is “known” in advance, changes to the central bank’s statement, the tone of Chairman Powell’s press conference, and the Summary of Economic Projections (dot plots) could still lead to a volatile market reaction based on how they impact the implied odds of a rate cut at the end of January. As of writing, the CME’s FedWatch tool is showing about 91% odds of keeping interest rates unchanged at the January meeting in seven weeks’ time.
Possible Market Movers
With the unemployment rate at 3.5% and the recent strong Non-Farm Payrolls from the US, chairman Powell most likely will not have to face questions regarding employment data. However, with Core PCE remaining at 1.6%, Powell may have to deal with how best to reintroduce inflation back into the economy to arrive at its 2% target. Additionally, there is still concern regarding the repo markets heading into year end. Powell surely will be questioned about the possibility of additional QE (“not QE”).
The dot plots will be closely watched to see if there are any changes in the Fed forecasts. If the Fed sees more interest rate cuts coming down the pike, traders will have to factor this into market prices, and the US Dollar may head lower. However, if they have a hawkish statement, the DXY may rise into year end. In addition, the Fed will have to consider possible outcomes of the US-China trade war, including the possible increase in the prices of consumer goods due to tariffs.
There will be many factors in play today at the FOMC meeting and press conference when the Fed releases its statement and dot plots. However one thing is almost certain, the Fed will not move on rates.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.