Federal Reserve Chairman Jerome Powell takes a question from a reporter during a news conference following a meeting of the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Board Building. on July 31, 2024 in Washington, DC.
Andrew Harnik | Getty Images
Despite the hype they get, Federal Reserve meetings are usually pretty predictable affairs. Policymakers telegraph their intentions in time, markets react, and everyone has at least a rough idea of what’s going to happen.
Not this time.
This week’s meeting of the central bank’s Federal Open Market Committee has an unusual air of mystery about it. While markets have collectively decided that the Fed is going to cut interest rates, there is intense debate over how far policymakers will go.
Will it be the traditional cut of a quarter of a percentage point or 25 basis points, or will the Fed take an aggressive first step and go to 50 or half a point?
Fed watchers aren’t sure, setting the stage for an FOMC meeting that could be even more impactful than usual. The session ends on Wednesday afternoon, with the publication of the Fed’s interest rate decision coming at 2 p.m. ET.
“I hope they cut 50 basis points, but I suspect they will cut 25. My hope is 50, because I think interest rates are too high,” said Mark Zandi, chief economist at Moody’s Analytics. “They’ve achieved their mandate of full employment and inflation back on target, and that’s inconsistent with the 5.5 percent interest rate target. So I think they need to normalize rates quickly and have plenty of room to do so.”
Pricing in the derivatives market around what the Fed will do has been volatile.
By late last week, traders had locked in a 25 basis point cut. Then on Friday, sentiment suddenly changed, putting half a point on the table. As of Wednesday afternoon, Fed Funds futures traders were pricing in about a 63% probability of the biggest move, a comparatively low level of conviction compared to previous meetings. One basis unit equals 0.01%.
Many on Wall Street continued to predict that the Fed’s first step would be more cautious.
“The experience of tightening, while it seemed to work, didn’t quite work as they thought it would, so easing should be treated with the same uncertainty,” said Tom Simons, US economist at Jefferies. “So if you’re unsure, you shouldn’t rush it.”
“They’ll have to move quickly here,” Zandi said, expressing the most disdainful view. “Otherwise they risk breaking something.”
The debate inside the FOMC meeting room should be interesting and with an unusual split among officials who have generally voted together.
“I guess they’re separated,” former Dallas Fed President Robert Kaplan told CNBC on Tuesday. “There will be some around the table who feel like I do, that they’re a little late and they’d like to get on the front foot and they’d rather not spend the fall chasing the economy. be others who, from a risk management perspective, just want to be more careful.”
Beyond the 25 vs. 50 debate, this will be an action-packed Fed meeting. Here’s a breakdown of what’s in use:
The hold rate
The FOMC has kept the key fed funds rate in a range between 5.25%-5.5% since it was last raised in July 2023.
That’s the highest it’s been in 23 years, and it’s held there despite the event The Fed’s preferred measure of inflation fell from 3.3% to 2.5% and the unemployment rate rose from 3.5% to 4.2% during that period.
In recent weeks, Chairman Jerome Powell and his fellow policymakers have left no doubt that a cut is coming at this meeting. Deciding on how much will involve a balance between fighting inflation while keeping in mind that the labor market has slowed significantly over the past several months.
“For the Fed, it comes down to deciding which risk is more important — rekindling inflationary pressures if they cut by 50 bps or threatening recession if they cut by just 25 bps,” said Seema Shah, head of global strategy at Principal Asset Management. he said in a written comment. “Having already been criticized for responding too late to the inflation crisis, the Fed will likely be cautious in reacting rather than proactively to the risk of recession.”
the “dot”
Perhaps just as important as the rate cut will be the messages sent by meeting participants about where they expect interest rates to go from here.
This will happen through the “dot plot,” a grid in which each official will mark how they see things going over the next several years. The September plot will provide the first perspective on 2027.
In June, FOMC members made only one rate cut until the end of the year. That is almost certain to accelerate, with markets pricing in as many as five, or 1.25 percentage points, cuts (assuming 25 basis point moves) with just three meetings remaining.
Overall, traders see the Fed hiking rates next year, taking off 2.5 percentage points from the current overnight lending rate before pausing, according to CME Group. FedWatch futures counter.
“That seems overly bullish unless you know the economy is going to start to weaken more significantly,” Zandi said of the market’s outlook. Moody’s expects quarterly cuts at each of the three remaining meetings this year, including this week.
Economic forecasts
The dot chart is part of the FOMC’s Summary of Economic Projections, which provides unofficial forecasts for unemployment, gross domestic product and inflation as well.
The biggest adjustment for the SEP will likely come with unemployment, which the committee is almost certain to raise from the 4.0% year-end forecast in June. The unemployment rate currently stands at 4.2%.
Core inflation, which was pegged in June at 2.8% for the full year, will likely be revised lower as it was last seen at 2.6% in July.
“Inflation looks on track to fall short of the FOMC’s June forecast, and the higher prints at the start of the year look increasingly like residual seasonality rather than an acceleration. A key theme of the meeting will therefore be a shift in risk focus of the labor market.” Goldman Sachs economists said in a note.
Powell’s statement and presser
In addition to adjustments to the dot chart and SEP, the committee’s post-meeting statement should be changed to reflect the expected rate cut along with any additional future guidance the committee adds.
Posted at 2 p.m. ET, the statement and the SEP are the first things the market will react to, followed by Powell’s press conference at 2:30.
Goldman expects the FOMC “will likely revise its statement to sound more confident about inflation, portray risks to inflation and employment as more balanced, and re-emphasize its commitment to maintaining maximum employment.”
“I don’t think they’re going to be very specific about any kind of forward guidance,” said Simons, the Jefferies economist. “Forward guidance at this point in the cycle is of little use when the Fed doesn’t really know what it’s going to do.”
