Some semblance of stability is returning to financial markets ahead of the hotly anticipated Federal Reserve rate decision and press conference on Wednesday evening UK time.
The Fed is widely expected to cut interest rates by 25 basis points and anything outside this will come as a major shocker to investors, especially if the central bank does nothing at all or fires a 50 basis point bazooka. Given how this move is already heavily baked into market pricing, the actual decision to reduce rates will have a muted impact on global stocks and the Dollar.
I think investors should keep a very close eye on the number of dissenters among Fed members which should shape monetary policy expectations beyond September. Two members of the Federal Reserve dissented from July’s rate cut: Esther George and Eric Rosengren. Should more voting members join the hawkish camp, the growing divide in the committee could force markets to re-evaluate the Fed’s monetary policy path for the rest of 2019.
Given how economic data from the United States continues to paint a mixed picture, the Fed statement may repeat the same message as July. It will be interesting to see whether policymakers will view this potential rate cut as another "mid-cycle adjustment"
In regards to the dot plot, the question on the mind of many investors will be whether the mounting risks across the globe have resulted in the medium dot showing another rate cut this year. A lower dot-plot path in 2019 and 2020 will be seen as dovish, something that may weaken the Dollar and boost speculation around further rate cuts.
Market players should not expect any fireworks from Jerome Powell who continues to dance on a tight rope. He may reiterate how trade uncertainty and decelerating global growth remain a threat to the US economy. Don’t be surprised if he drops the line on how the Fed will continue to act “as appropriate” to sustain the economic expansion.
The drama witnessed in the repo markets that saw lending rates skyrocket to levels not seen since 2008 remains the elephant in the room. While this was attributed to technical factors, it will be interesting to see whether this topic is discussed during Powell’s press conference.
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