Fed meeting today: Wall Street on edge over historic interest-rate ...
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Wednesday's policy announcement by the Federal Reserve is likely to trigger a flurry of activity in financial markets. So strategists at BMO Capital Markets have created a list of items to help investors know how to trade all the new information that's about to be released.
Ranked in order of tradability, they are:
The size of the rate cut on Wednesday
The 2024 dot, or Fed's median interest-rate forecast
The 2025 dot
The longer-run dot
Changes to the unemployment rate, real GDP growth, PCE inflation forecasts in the Summary of Economic Projections
The tone set by Chair Jerome Powell during his press conference
(Dow Jones Market Data)
Do rate cuts with the stock market at or near all-time highs provide bulls additional fuel or do they portend trouble ahead? Dow Jones Market Data ran back the tape.
They found that since 1990, the Fed has cut rates seven times while the S&P 500 was at or near (within 1%) of an all-time high (see table above). In those instances, stocks tended to rise on decision day — up 71.4% of the time with a median gain of 0.51%. Six months later, the performance is mixed, rising 57.1% of the time with a tepid median gain of 0.62%.
That’s interesting, but does it really tell investors much about the stock market’s direction over the course of the easing cycle? As countless market watchers have pointed out, it tends to depend on the economic backdrop.
The case for a half-point cut is "overblown," former St. Louis Fed President James Bullard said Wednesday, in an interview on CNBC.
If the Fed engineers a half-point cut, it would quickly raise the question of why not keep that strong pace in coming meetings.
Does the Fed want to cut by 200 basis points by January and get to neutral, Bullard asked.
"That seems awfully fast," he answered.
"It would be better to keep a half-point cut in its pocket," he added.
Ahead of Wednesday's widely anticipated interest-rate cut from the Federal Reserve, one model is predicting that real U.S. GDP growth for the third quarter will come in at 3%, underscoring the rather unusual predicament facing the central bank.
The 3% figure comes from the Atlanta Fed's GDPNow tracker as of Tuesday. It is another example of how Fed officials are navigating a tricky environment in which the economy continues to hold up, but the central bank is looking to cut interest rates anyway.
Wall Street economists remain open a smaller quarter-point move at today's meeting, while traders in derivative markets have settled on a half-point cut.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, remains in the quarter-point camp.
"While there is a compelling risk management case to support a larger move, Fed communications before the blackout period and the balance of data do not clearly argue for a larger cut," Luzzetti said.
The size of the Federal Reserve's rate cut on Wednesday "is not the most important message at this week’s FOMC gathering," according to the economics team at investment-management firm Payden & Rygel in Los Angeles.
"The pace of easing hinted at by the Fed likely matters more than the September rate move," the team wrote in an email.
Bond-market pricing implies "a rapid return to 3% by July 2025," down from a current level of the fed-funds rate target of between 5.25%-5.5%, the team added. "Policymakers will likely revise down the path of the fed funds rate in the dots, but will it be enough to satisfy the bond market? It seems like the bond market is set up for disappointment."
The Federal Reserve has two jobs: Keep inflation low and keep unemployment low. That's what Congress requires by law.
Job No. 1 has mostly been accomplished. Job No. 2 is in more doubt.
The yearly rate of inflation has slowed to 2.5% from a 40-year peak of 7.1% a few years ago, based on the Fed's preferred PCE price index. The current rate is not far from the Fed's 2% target.
The Fed's other priority - maintaining a strong labor market - has overtaken inflation as the chief worry. If Fed officials think the labor market is worse than it looks, they are sure to step up the pace and size of rate cuts.
Mind you, Fed officials had hoped higher interest rates meant to bring inflation to heel would also cool off an overheated labor market. And that's exactly what happened.
Job openings have tumbled, hiring has petered out and the unemployment rate has risen to 4.2% from a cycle low of 3.4%.
Yet the Fed doesn't want unemployment rise much further - instead it seeks a Goldilocks labor market that is neither too hot nor too cold.
Fed Chairman Jerome Powell vowed in a major speech a few weeks ago that "we will do everything we can to support a strong labor market."
History shows the Federal Reserve typically doesn’t deliver a “hawkish surprise” to markets, as investors wait to learn the size of a widely expected interest-rate cut by the Fed on Wednesday, according to BofA Global Research.
The federal-funds futures market sees a higher probability that the Fed will decide on Wednesday to lower its benchmark rate by a half-point rather than a smaller quarter-point cut, according to the CME FedWatch Tool, at last check.
“The Fed typically only surprises the market in a dovish direction,” said BofA rates strategists in a research note dated Sept. 17. “The Fed generally likes hawkish signals to be well telegraphed so as not to surprisingly tighten financial conditions.”
The Fed will announce its rate decision Wednesday at 2 p.m. Eastern time, after wrapping up its two-day meeting on monetary policy. “Buckle up,” said the BofA strategists.
(SATORI INSIGHTS)
The Fed is poised to loosen monetary policy for the first time in more than four years on Wednesday. But was it ever truly tight in the first place?
According to one closely followed gauge of how markets responded to the Fed's rate hikes, the answer is no.
The Chicago Fed's financial-conditions index never broke above zero during the Fed's rate-hiking cycle, adding to a mosaic of factors that make Wednesday's expected rate cut unique compared with past easing cycles, according to Matt King, founder of Satori Insights.
"It is already remarkable that the Fed is preparing to embark on an easing cycle when — to judge from their own financial conditions indices — they never managed to make financial conditions tight in the first place. Turbocharging this with a 50 [basis point] initial move — used previously primarily to send a strong statement against backdrops of sharply tightening financial conditions such as 2001 and 2007 — would send a stronger statement still," King said.
And while other models maintained by the central bank tell a different story, the message from financial markets is an important one, and policy makers ignore it at their own peril, King said. That's because markets have more influence on the real economy than many, including senior Fed officials, appear to believe.
For example, King said, the rally in risk assets like stocks likely helped stave off a recession over the past 18 months.
Fed funds futures traders are pricing in an "excessive" amount of rate cuts totaling more than a full percentage point for this year, and the Federal Open Market Committee is unlikely to endorse such expectations, according to one strategist.
After the Fed's statement, Chair Jerome Powell "is unlikely to rock the boat too much in his accompanying press conference and may largely repeat his communications from the Jackson Hole symposium" said Matthew Ryan, head of market strategy at global financial services firm Ebury in London. "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," Ryan wrote in an email.
