The Fed said a lot by saying nothing about their decision yesterday
The Fed cut rates by 25 bps and we got the same two dissenters arguing for rates to stay unchanged (George and Rosengren), though Bullard argued for an added 25 bps rate cut on top of the one yesterday.
Meanwhile, Powell's press conference didn't say much as he alluded to the fact that the Fed isn't on a "preset course" and they will be taking things from "meeting to meeting".
So, what does markets have to go on right now?
Dot plots suggest no more rate cut for 2019
But do they really? That is one of the questions that markets have to figure out right now. The median calls for no more rate cuts this year but five dots are seen above the current Fed funds rate while seven sit below it.
I reckon that is more suggestive of potentially one more rate cut if conditions allow for it. I think the more telling thing here is how divided the Fed is going into next year instead.
There are nine dots suggesting that rates should be held steady/higher while there are eight dots suggesting one more rate cut.
That essentially tells us that the Fed isn't really sure what to do at the moment and they are hoping for external factors to guide them or corner them into a decision.
On the balance of things, if you pair this with Powell's message, it means that we may yet see one more rate cut before the year-end if and only if there is a need for it. Otherwise, we may be nearing the lower bound of this so-called "mid-cycle adjustment".
No clear hints of what to expect in October
This is where things start to get interesting as markets have to decide for themselves whether or not we will see another rate cut next month.
I think the key takeaway among everything that was said yesterday is that we saw no push back by the Fed to tell us that a rate cut may not come in October.
Currently, Fed fund futures are showing that markets are still quite divided on whether or not we will see another 25 bps rate cut next month. Odds of that stand at ~43% and essentially, markets are waiting on "the next big thing" to influence/skew the odds away from being close to a 50-50 decision over the next few weeks.
Markets waiting on "the next big thing"
So, what is this "next big thing"? Well, it can be anything really; from economic data, to Fed speak, to geopolitical tensions, to US-China trade developments, or even Trump tweets.
I think the main detail here is that the Fed hasn't given markets a firm indication of what it is focusing on in the latest round of cuts. "Insurance" is a very broad scope and one day it is inflation, then it could be trade, then it could be domestic worries, and then it could be a worsening global outlook.
If anything else, it looks like Powell & co. are hoping that markets will find comfort in the data and global developments to price out expectations of a rate cut. But if markets don't do that, then the Fed isn't willing to fight back and instead get bullied into further cuts as we saw in July and yesterday as well.
It could be the same case next month too but we'll see what happens between now and 31 October. Markets will eventually latch on to something to skew odds towards one side or another and we will then see if the Fed has the guts to fight back if they see fit.
