Fed funds futures still show a 18% probability of a 50 bps rate cut today
I reckon that's in part to do with expectations that the Fed will perform more cuts later in the year so I wouldn't put much emphasis on that. The pricing suggests that the Fed will cut rates three times by the end of 1H 2020.
In my view, the dollar performance over the past week is more conclusive of expectations ahead of the meeting as markets are starting to lean more towards the Fed decision this week as being a "one and done" scenario.
A 25 bps rate cut is pretty much all but guaranteed but the question is will there be more?
At this stage, pricing in three rate cuts by 1H 2020 is a bit too aggressive for my liking because there isn't much in the data to suggest that the Fed should be going down that path.
Sure, there are little worries here and there but if the state of the US economy - which is outperforming its peers - is going to drive the Fed into an aggressive easing cycle, then what does that say about the rest of the world?
As we go into the meeting today, there's a sense of déjà vu with the dollar looking to be the best of a bad bunch once again.
However, knowing the Fed, they will try to gather as much flexibility as possible with their policy options even though they may not necessarily pursue such a stance.
As such, they will cut rates today and leave the door open for a further accommodative stance to follow later in the year. They can't outright communicate this as a "one and done" event but it very well should be.
At the same time, they can't go back to their previous communication so I reckon they will leave room for more rate cuts down the road but will stick to being data-dependent in the coming months before deciding on that.
Barring any major blowup in US-China trade talks and a significant slowdown in the US economy, perhaps one more rate cut may be due in the tail end of the year but otherwise, I just don't see this being the start of an aggressive easing cycle - for now at least.
