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 during the 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.
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 Nonfarm Payrolls from the U.S., 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 U.S. 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 U.S.-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. One thing is almost certain though, the Fed will not move on rates.