On July 31, 2024, Federal Reserve Chairman Jerome Powell answered questions from reporters at a press conference following the Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Building in Washington, DC.
Andrew Harnick | Getty Images
Despite all the hype, Fed meetings are usually fairly predictable affairs. Policymakers communicate their intentions in advance, markets react, and everyone has at least an overall understanding of what’s going to happen.
Not this time.
This week’s meeting of the central bank’s Federal Open Market Committee was filled with a rare air of mystery. While the market consensus is that the Fed will cut interest rates, there is still fierce debate over how far policymakers will go.
Will it be a traditional 25 basis point or 25 basis point rate cut, or will the Fed take an aggressive first step and cut interest rates by 50 basis points or half a basis point?
Fed watchers are unsure, believing the Federal Open Market Committee meeting could have more impact than usual. The meeting ends on Wednesday afternoon, with the Fed releasing an interest rate decision at 2 p.m. Eastern Time.
“I hope they cut rates by 50 basis points, but I doubt they will cut rates by 25 basis points,” said Mark Zandi, chief economist at Moody’s Analytics. “My hope is 50 basis points because I think rates are too high.” They’ve achieved their mandate of full employment and inflation back on target, but that’s not consistent with a funds rate target of about five and a half percent, so I think they need to normalize rates quickly and there’s a lot of room to do that. to this point.”
Pricing in derivatives markets surrounding the Fed’s actions has been volatile.
It wasn’t until late last week that traders locked in a 25 basis point rate cut. Then on Friday, a sudden shift in market sentiment brought the situation down by half a point. As of Wednesday afternoon, fed funds futures traders were pricing in about a 63% chance of larger moves, a relatively low level of confidence compared with previous meetings. 1 basis point equals 0.01%.
Many on Wall Street continue to predict that the Fed’s first steps will be more cautious.
Tom Simons, U.S. economist at Jefferies, said: “Tightening, while it looks effective, is not working exactly as they thought it would, so easing should be equally uncertain. “So if you’re not sure, you shouldn’t rush.”
“They should act quickly here,” Zandi said, expressing a more dovish view. “Otherwise they risk damaging things.”
The debate inside the Federal Open Market Committee (FOMC) chamber should be interesting and feature unusual disagreements among officials who usually vote in unison.
“My guess is they have a disagreement,” former Dallas Fed President Robert Kaplan told CNBC on Tuesday. “There will be some at the table who feel like I do, that they’re a little late to the game and they want to get ahead of the game and don’t want to spend the fall chasing the economy. Others just want to be more careful from a risk management perspective. “
Aside from the 25 versus 50 debate, this will be an action-packed Fed meeting. Here’s a breakdown of what’s available:
rates etc.
The FOMC has kept the benchmark federal funds rate in a range of 5.25%-5.5% since its last hike in July 2023.
This is the highest level in 23 years, although During that period, the Fed’s preferred inflation gauge fell from 3.3% to 2.5%, and the unemployment rate rose from 3.5% to 4.2%.
In recent weeks, Chairman Jerome Powell and other policymakers have made it clear that a rate cut will come at this meeting. Deciding how much will require a trade-off between fighting inflation and keeping an eye on the sharp slowdown in the labor market over the past few months.
Seema Shah, chief global strategist at Principal Asset Management, said: “For the Fed, it comes down to deciding which risk is greater – if it cuts rates by 50 basis points, it will reignite inflationary pressures; if it cuts rates by only 25 basis points, it will reignite inflationary pressures; if it cuts rates by only 25 basis points, it will “The Fed has already been criticized for being too slow to respond to the inflation crisis, so it may be cautious about reacting to the risk of recession rather than taking a proactive approach. “
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Perhaps as important as the rate cuts are the signals from meeting participants about where they expect rates to go.
This will be done through “dot plots”, where each official will indicate on a grid how they see events developing over the next few years. Land in September will provide the first outlook for 2027.
In June, members of the Federal Open Market Committee (FOMC) expected just one rate cut before the end of the year. This will almost certainly accelerate as the market is pricing in a 5 percentage point cut, or 1.25 percentage points (assuming a 25 basis point cut), with only 3 meetings remaining.
Overall, traders expect the Fed to cut interest rates sharply next year, cutting current overnight borrowing rates by 2.5 percentage points and then stopping, according to CME Group. Fed Watch Indicator for futures contracts.
“It feels too aggressive unless you know the economy is going to start to weaken more severely,” Zandi said of the market outlook. Moody’s expects 25 rate cuts at each of the three remaining meetings this year, including this week’s meeting. basis points.
economic forecast
The dot plot is part of the Federal Open Market Committee’s summary of economic forecasts, which also provides unofficial forecasts for unemployment, gross domestic product and inflation.
The biggest adjustment to the SEP is likely to be the unemployment rate, which the committee will almost certainly revise up from June’s year-end forecast of 4.0%. The current unemployment rate is 4.2%.
The full-year core inflation rate in June was 2.8%, which may be revised down, and it was 2.6% in July.
“Inflation looks set to be lower than the Federal Open Market Committee (FOMC) forecast in June, and the higher numbers at the start of the year look increasingly like residual seasonality rather than a reacceleration. A key theme of the meeting will therefore be It is to turn the focus to labor market risks.
Statement and Powell’s reporters
In addition to adjustments to the dot plot and SEP, the Committee’s post-meeting statement must also be changed to reflect the expected rate cuts and any additional forward guidance the Committee will add.
The statement and SEP were released at 2pm ET and were the first things the market reacted to, followed by Powell’s press conference at 2:30pm.
Goldman Sachs predicts that the FOMC “is likely to revise its statement to be more confident about inflation, describe risks to inflation and employment in a more balanced manner, and reemphasize its commitment to maintaining maximum employment.”
“I don’t think they’re going to be particularly specific about any kind of forward guidance,” said Simons, an economist at Jefferies. “When the Fed doesn’t actually know what they’re going to do, at this point in the cycle At this stage, forward guidance is of little use.”
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