The Federal Reserve is odds-on to deliver its second interest rate cut in just over a decade on Wednesday, with markets discounting another 25 basis points reduction after the latest FOMC meeting.
July’s FOMC meeting saw the first US rate cut since December 2008, which Fed Chair Jerome Powell emphasised should not be interpreted as the start of a series of aggressive moves, instead, it was termed a “mid cycle adjustment”.
Powell drew a parallel with the three rate cuts in 1995-96 or the three in 1998 that were enough to keep the US out of recession despite headwinds to economic activity.
“Mid-cycle easing” will likely remain the theme on Wednesday, with the cut likely to be justified as insurance to offset the trade and global headwinds facing the US economy, even though rising inflation and a strong consumer mitigate against the reductions.
In a recent note, Neil Wilson, chief market analyst for Markets.com pointed out, however: “The question facing the market is how many more there are to come. Are we at the end of the mid-cycle adjustment, or the early stages of a full-blown easing path? Will we get yet another flip-flop?”
He continued: “Traders are increasingly less confident in the number of cuts the FOMC will carry out this year. A hawkish cut is a firm possibility, albeit the median projected fed funds rate from the dots should come down a touch.”
In July, two FOMC voting members – Esther George and Eric Rosengren – voted against the rate cut, and Wilson noted that there are signs of increasing dissention in the ranks, which could make it harder for Jerome Powell to deliver a firmly dovish message to the market.
Wilson also pointed out that Powell has had not had the best time in the press conferences after the FOMC meeting statements and although the consensus is that the Fed will maintain an easing bias, there is the risk of a hawkish tone to proceedings.
Supporting the hawkish case, economic data has certainly not indicated imminent recession in the US, with robust signs of domestic demand holding up and the consumer proving notably resilient.
On the other hand, trade war impact fears, falling business investment, manufacturing weakness and slumping global growth mean the risks are likely to outweigh the positives again.
READ: US August jobs data misses forecasts, adds to expectations Federal Reserve will cut rates again
Wilson pointed out that the Trump factor is ever-present as well, and the markets should expect a tweet storm before and after the statement from the US President whatever the Fed decides to do.
Equity markets sold off heavily in the wake of the July rate cut announcement, partly as a result of some disappointment in the Fed’s comment, whilst trade war risks had also spiked after more tweets from Donald Trump.
However, since August Inflation figures have showed continued uplift, the China trade cold war has thawed a little, and equity markets have notably calmed.
The analyst pointed out: “Following the August decline, in recent days yields have come back in line with the Fed. But once again the Fed has painted itself into a corner where it will have to play catchup to the markets and cut.”
He noted that the CME FedWatch tool indicates roughly a 66% chance of a cut at the latest FOMC meeting, albeit a shift from around a 90% probability in recent days.
Markets suggest roughly a 25% chance of another cut by October, but similarly around a 25% likelihood of no cut in either September or October, and a 14% chance of no cut by the year-end.
Wilson concluded: “Boxed in again and faced with a tonne of political pressure and economic uncertainty, a cut is assured. However, the Fed may be minded to row back a little and take the opportunity to try and temper market expectations for further cuts.
“We could get a hawkish cut, but the consensus is for the Fed to maintain an easing bias.”
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