What to look out for going into the Fed decision later today?

Author: Justin Low | Category: News

Let's break things down on what to expect from the Fed and Powell today


It is the main event in markets today and just about everyone is waiting on the decision before committing to any firm directional moves across asset classes. So, what is expected from the Fed and what are the things to watch out for later today?

A 25 bps rate cut is a given

As much as it irks me to see the Fed cut 50 bps in three months, they are going to do so by delivering another 25 bps rate cut today.

This is pretty much baked into market pricing already but if anything else, expect equities to still see some bit-part relief on the decision as it reaffirms the easing path that the Fed is on currently, despite Powell's claims of a "mid-cycle adjustment".

I don't expect a 50 bps rate cut whatsoever as that would be too drastic and insatiable to imagine happening. There's just no way that Fed members would get on board such a decision to throw away their buffer so quickly and so suddenly.

The thing to watch out for with regards to the rate cut decision today is to keep an eye out for the dissents among voting Fed members. If anything else, I would expect Esther George and Eric Rosengren to dissent again but it'll be interesting to see how much more divided the committee really is in terms of further rate cuts.

Fed statement to reiterate the same message as July

In large parts, I would expect the Fed statement to remain somewhat similar to what has been offered to markets in July.

The easing/defensive bias will clearly stay in place but perhaps there could be a bit of a tweak to the outlook - particularly on trade - that may suggest that this "mid-cycle adjustment" still has some added room to go.

That said, I wouldn't view the changes to be groundbreaking unless the Fed decides to spring a surprise or two by tweaking their language on inflation and guidance - which is unlikely.

Fed projections, downside bias to the dot plots?

DotsLatest FOMC dot plots ahead of the updated projections today

There's arguably only one thing that markets will keep their eye on here and that is the dot plots that are set to be released/updated. The first thing to watch here is whether or not the median will skew towards any more rate cuts in 2019.

If the dots are suggestive of another rate cut before the year-end, that may still be taken as a bit more of a dovish signal - pay attention to the 2020 outlook as well - even though markets have priced in such a move already going into the meeting today.

Then again, if the dots are less suggestive of more rate cuts going into next year, it could lend some relief for the dollar as market pricing suggests something just over one rate cut currently going into 2020.

The dots outlook for next year will be the next thing to keep an eye out for but I would expect that to be more spread out and show a bit of a divided outlook.

Fed members are struggling to identify whether or not they need to go forward with an extensive easing cycle so I reckon we'll see that reflected in the projections above.

Powell continues to walk on a tightrope

I don't think we should expect anything new from Powell. He will attribute the latest decision to cut rates by 25 bps as being part of the so-called "mid-cycle adjustment" and emphasise that the Fed will do what it has to in order to "sustain the economic expansion".

There are a couple of pressing issues he will have to talk his way out of and particularly that of inflation. There haven't been clear cut signs of a major drop off since July so he won't have much to argue here.

Instead, expect him to allude to the trade war and risks to the global outlook instead. It's pretty much the same script as we saw in July and he doesn't have much incentive to change that whatsoever in his press conference today.

If you think his stuttering and stumbling in July was bad enough, I think we may possibly see more of that again later in the day.

How will the latest funding chaos play into all of this?

I reckon this will either be a key issue that overrides the Fed decision later or it could just be a whole lot of nothing. But it is best to just take note of this in case markets do decide to focus on the matter in the aftermath of the Fed decision.

I'll repeat what I said earlier in the day for some background:

The uncertainty surrounding the repo market has left the dollar in a bit of a softer position in the run-up to the Fed later today and essentially the Fed having to inject cash into the money market proved they themselves don't know what is happening.

The real worry here is that this won't just be some short-term anomaly and the Fed having to constantly step in or introduce more permanent measures to address the issue is a sign of an unhealthy market.

There is zero chance the Fed can afford to lose control of rates (especially the EFF), so we could possibly see them put up a standing repo facility (while trying to dig deeper to figure out the root of the problem) or reintroduce QE of sorts by bolstering the balance sheet.

Whatever the case is, there is potentially something roil in the money market and repos that are undermining the Fed's capacity to fully transmit monetary policy to the real economy. That is not a good signal to businesses and consumers if this persists.
As mentioned, the Fed cannot afford to lose control of rates and they may send a strong signal today to let markets know of that. However, depending on how strong the signal they are sending, it could lead markets to believe that there is potentially something rotten that hasn't been discovered yet in the money market.

As such, by allowing the balance sheet to grow again - by purchasing Treasuries, essentially QE - the decision itself may weigh on the dollar as markets (and the Fed) continue to try to figure out what is driving the anomaly here.

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