FOMC Risk Event: A Detailed Preview
The FOMC policy decision is scheduled for later tonight at 7 PM UK time, with the press conference at 7:30 PM. This decision will not include a summary of economic projections or an updated dot plot—only the decision and statement, followed by a press conference with Fed Chair Powell.
Significance of This Meeting
The disconnect between the Fed’s projections and the market’s expectations makes this meeting particularly interesting. In June, the Fed indicated the likelihood of only one rate cut this year, citing slower inflation progress in the first quarter. However, over the past month, market sentiment has shifted dramatically, now almost fully pricing in three rate cuts by the end of the year. This discrepancy between the Fed’s June guidance and current market pricing forms the crux of tonight’s decision.
Current Market Expectations
- September Cut: 28 basis points already implied.
- November Cut: Nearly fully priced at 45 basis points.
- December Cut: Approximately 6.5 basis points away from full pricing.
Core Questions for the FOMC
the market’s expectation of three cuts:
- Does the FOMC believe three cuts are feasible this year?
- Will September be the first cut?
Factors Influencing Market Sentiment
- Inflation: Despite being above target, there are signs of inflation easing, which could give the Fed confidence that it is moving towards its goal sustainably.
- Labor Market: Although still strong, there are emerging signs of slack. Key figures like Goolsbee, Daly, and Waller have expressed concerns about this shift.
- Language Shifts: Recent communication from Fed officials has shown slight dovish adjustments, adding to market expectations for rate cuts.
Possible FOMC Responses and Their Implications
- Rate Guidance:
- Hawkish: Unchanged language suggesting no immediate rate cuts.
- Dovish: Indications that the Fed is increasingly confident in inflation trends and may soon find it appropriate to reduce rates.
- Inflation:
- Hawkish: Unchanged statement.
- Dovish: Recognition of significant progress towards the 2% target.
- Labor Market:
- Hawkish: Unchanged statement.
- Dovish: Acknowledgment of growing slack in the labor market.
- Forward Guidance:
- Hawkish: Continued caution and data dependency.
- Dovish: Signs of moderating inflation and slowing economic activity, hinting at a less restrictive policy stance soon.
Press Conference Expectations
Key areas to watch during Powell’s press conference include:
- Rate Guidance:
- Hawkish: Statements about the necessity of maintaining current policy stance.
- Dovish: Indications of growing confidence in inflation control and the potential for policy easing soon.
- Employment:
- Hawkish: Reassurance that current data aligns with June’s expectations.
- Dovish: Increased focus on signs of slack in the labor market.
- Dot Plot: Powell’s comments on the gap between June’s projections and current market expectations.
- Hawkish: Dismissal of recent data as insufficient to alter June’s projections.
- Dovish: Acceptance that market pricing reflects current FOMC views, suggesting more than one cut may be on the table.
Potential Market Reactions
- Dovish Outcome: Dollar down, yields down, equities up, gold up.
- Hawkish Outcome: Dollar up, yields up, equities down, gold down.
Trading Strategies
- Dovish Scenario:
- Equities Long: S&P could rally from current levels.
- T-Bonds Long: Potential breakout above 120.20.
- Dollar/Yen Downside: Targeting March lows around 147-146.
- Dollar/CAD Downside: Aiming for June highs around 1.3780.
- Hawkish Scenario:
- Pound/Dollar Short: Significant downside potential.
- Dollar/Swiss Long: Trading at lows with potential for a rebound.
- Gold Short: Potential move towards recent lows around 2350.
Summary
Tonight’s FOMC decision will hinge on how the Fed reconciles its June projections with current market expectations. Key points to watch include any language shifts in the statement, Powell’s comments during the press conference, and the market’s reaction to any perceived dovish or hawkish signals. Good luck to everyone trading the event live, and remember to stay informed and cautious, especially if this is your first time.