Navigating the Fed Meeting: 5 Key Parts to Watch for in the Rate Cut Decision
In this highly anticipated Fed meeting, traders are not just asking whether the Fed will cut rates by 25 or 50 bps—but rather how deep the cuts will go and how long they’ll last. With so much at stake, understanding the Fed’s multi-layered decision-making process is key. From the rate decision and statement to the Summary of Economic Projections (SEP) and Powell’s speech, every aspect can impact market direction.
This practical guide highlights two key scenarios for traders: a USD bullish setup or a USD bearish opportunity, depending on the Fed’s tone and future rate outlook. Whether you’re trading EUR/USD, USD/JPY, or other majors, this breakdown will help you prepare for the volatile moves that are sure to follow.
- Rate Decision (25bps or 50bps): Will we see a modest 25bps cut, or has the situation evolved enough to warrant a more aggressive 50bps cut? As of Monday, the odds have shifted toward a 50bps cut, with 58% market pricing reflecting this expectation.
- Rate Statement & Summary of Economic Projections (SEP): This includes the infamous dot plot, which will provide clues on the Fed’s future rate path. In a hawkish scenario, look for signals of higher rates, especially for 2024 and beyond. For instance, if the SEP reflects rates for 2024 at or above 4.9%, 2025 at or above 3.6%, and 2026 above 2.9%, we could see a strong USD rally. On the flip side, a more dovish SEP with projections below these thresholds would support dollar weakness.
- Powell’s Speech and Q&A: This is where Fed Chair Jerome Powell will likely clarify any ambiguities in the rate decision and projections. Powell’s tone will be critical—does he suggest more cuts are coming, or does he maintain a cautious stance about future easing? His comments on inflation trends, labor markets, and growth will help shape the market’s near-term outlook. If Powell emphasizes front-loading cuts and a swift return to neutral rates, expect to see the USD sell-off sharply, particularly against the euro and yen.
- The Market Reaction: Given the complexity of this decision, trading the initial release can be treacherous. We could see choppy moves as markets digest the rate cut, the SEP, and Powell’s remarks. It’s not uncommon in these situations to see conflicting signals, making it difficult to determine a clear direction in the immediate aftermath. Often, the best strategy in these conditions is to wait until the dust settles before entering any trades.
Two Key Scenarios:
USD Bullish Scenario (25bps Cut, Hawkish SEP & Powell’s Tone)
- Rate Decision: A smaller 25bps cut, now less expected but still possible.
- Rate Statement: A repeat of cautious language such as “assessing incoming data and evolving risks.”
- SEP Signals higher future rates, e.g., 2024 projections above 4.9%, unemployment below 4.3%, and GDP holding steady or higher.
- Powell’s Speech: Powell sticks to a balanced tone, emphasizing inflation risks and the need for ongoing vigilance.
- Outcome: Expect strong USD buying, with heavy selling pressure on EUR/USD and strong buying in USD/JPY.
USD Bearish Scenario (50bps Cut, Dovish SEP & Powell’s Tone)**:
- Rate Decision: A 50bps cut, with the market already leaning in this direction.
- Rate Statement: Signals more cuts are likely, potentially front-loading rate reductions to avoid a hard landing.
- SEP: Projections for lower rates in 2024 and beyond, with inflation and GDP figures coming in below expectations.
- Powell’s Speech: Powell doubles down on the dovish rhetoric, discussing the need to swiftly normalize rates.
- Outcome: Heavy USD selling, with EUR/USD likely rallying and USD/JPY seeing strong selling pressure.