Fed preview report

Jerome Powell himself is unlikely to rock the boat too much in his accompanying press conference and may largely repeat his communications from the Jackson Hole symposium. He will probably make clear to markets that additional cuts are coming, and he may hint that every meeting this year is a ‘live’ one.

If anything, however, we think there is a much greater risk that Powell will disappoint market expectations.

Futures are still pricing in around 115 basis points of cuts this year. This seems excessive, particularly given recent communications from Powell’s fellow FOMC members, including the likes of Bowman, Waller and Harker, who have all suggested that the Fed should proceed with a gradual pace of rate reductions. While we think that the Fed is perhaps somewhat behind the curve in lowering rates, we do not think that conditions are bad enough to warrant panic stations.

A 50 basis point cut does not appear to be in the offing, nor do we think that the FOMC will be prepared to fully endorse market pricing for rates. For now, we see a total of three 25 basis point cuts this year, in September, November and December, with another four or five to follow in 2025, depending on incoming data. Any indication from the Fed that a gradual pace of cuts remains their base case could provide some near-term upside for the dollar, particularly given the dovish market pricing.

On the other hand, a set of communications that flags heightened concerns over the labour market, while indicating that rates may need to be cut at every meeting deep into 2025, could trigger a fresh sell-off in the US currency. Clearly, however, the most bearish scenario for the dollar would be an immediate 50 basis point cut, which cannot be completely ruled out with the utmost of conviction.

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