FOMC Preview: Rate Cut Priced In, But Powell May Move Markets Regardless
Matt Weller, CFA, CMT October 29, 2019 10:42 AM
See why the Fed's comments could still move markets, even if a rate cut is inevitable...
In the wake of the Great Financial Crisis, Federal Reserve Chairman Ben Bernanke introduced a number of unconventional policies, including Quantitative Easing, one of the most controversial programs in the history of central banking…but the more lasting and undeniably effective policy has been ushering in the era of “communication-as-a-policy-tool.”
Over the past decade, there have been 83 FOMC meetings, with the interest rate decisions and market-implied pricing playing out in the following way:
- In 72 meetings, the market was anticipating no interest rate change, and the Fed left rates unchanged.
- In 9 meetings, the market was expecting a 25bps hike and the Fed delivered a 25bps hike.
- In 2 meetings (July and September), the market was expecting a 25bps cut and the Fed delivered a 25bps cut.
In other words, the Fed hasn’t gone against the market’s pre-meeting “conventional wisdom” even once in the past decade. With traders pricing in a 96% chance of a 25bps rate cut tomorrow according to the CME’s FedWatch tool, the FOMC will almost certainly cut interest rates 25bps and run the streak to 84 consecutive meetings.
Even though the immediate interest rate decision is “known” in advance, changes to the central bank’s statement and the tone of Chairman Powell’s press conference could still lead to a volatile market reaction based on how they impact the implied odds of a rate cut in December. As of writing, the CME’s FedWatch tool is showing about 15% odds of another interest rate reduction in six weeks’ time.
In terms of specifics, traders will key in on the committee’s characterization of international trade in the wake of progress between the US and China on trade, as well as any comments about the recently-slowing growth in job creation. In addition, the central bank’s decision last month featured three dissents (Bullard in favor of a 50bps cut, and George/Rosengren in favor of leaving rates steady); any further “dissension in the ranks” would introduce an element of uncertainty to the future outlook for policy.
In Powell’s testimony, the key topic to watch will be the Fed’s recent (re)introduction of asset purchases (which the central bank has definitively characterized as “NOT Quantitative Easing”). After the recent turmoil in the short-term funding market, traders will be keen for an update on the stability of this critical function of the financial system. If Powell indicates the program could expand from here or expresses pessimism about any other aspect of the economy, the US dollar could retrace last week’s gains and stock indices could surge further into record territory on the potential for further monetary support into the end of the year.
While its unlikely to be the most market-moving central bank meeting in recent memory, traders will still have plenty to digest tomorrow afternoon!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.