What are markets pricing in for the Fed as we await Powell's testimony later today?
Fed funds futures fully phase out a 50 bps rate cut for July
And odds of a 25 bps rate cut in July now stands at 98.5% after having been fully priced in almost since the June FOMC meeting. But the key change has been odds of a 50 bps rate cut, which has fallen dramatically after having previously been around ~27% before the release of last Friday's non-farm payrolls data.
Greg had a very nice preview on what markets will be looking out for in Powell's testimony today. Powell's mention of "an ounce of prevention is worth a pound of cure" two weeks ago is what markets are feeding off right now i.e. expecting a 25 bps "insurance rate cut" but nothing more than that.
That shows that the risk going into Powell's testimony is balanced on both sides of the equation. If Powell decides to communicate further dovishness, it would spur bets of more aggressive easing by the Fed in the coming months. However, if Powell decides to give the finger to Trump, that will put any chance of a July rate cut at risk.
Given how Fed funds futures are positioned, the latter scenario will generate the most buzz in markets and scope for dollar gains will be quite extensive.
But we have seen how politicised the Fed's statement and communication has been in the past month, so unless Powell really does something out of the ordinary, I reckon he will just reaffirm current sentiment without leading markets to expect an aggressive easing cycle from the central bank.
He can't frame or word it as an "insurance rate cut" directly but expect his tone and language to try and work towards that.