The Fed is widely expected to keep interest rates unchanged at 4.25-4.50%. Today we won’t get the SEP (Summary of Economic Projections) which will be released at the next meeting in September.
STATEMENT
The statement will likely remain unchanged but will likely acknowledge the easing in uncertainty.
The most notable change is expected in the last few lines of the statement where it’s shown how members voted on policy. Waller is widely expected to dissent and voting for a 25 bps cut at this meeting already. Another potential dissenter expected to vote for a 25 bps cut is Bowman.
Don’t take this as a surprise as it’s widely expected. Waller has been the most dovish member for several months and he’s been calling for earlier rate cuts because he doesn’t expect a sustained impact from tariffs. On the other hand, Bowman surprised back in June when she opened the door for a rate cut in July. Unlike Waller, she mentioned a few conditions that included signs of softness in the labour market (there have been very little) and contained inflationary pressures (we did get lower than feared inflation figures).
Waller and Bowman are the only dovish members now and they are absolutely trumped by all the others who prefer one or two cuts by the end of the year.
PRESS CONFERENCE
Fed Chair Powell will likely open the door for a rate cut in September but he will reiterate that it will be conditional to the data. Weaker labour market or inflation readings will give them more conviction to lower rates, while strong data might delay such change. This is expected as the market is pricing basically 70% chance of a rate cut in September.
I don’t see him giving any more details as they remain data dependent and all the questions will likely be dodged with the same “data will tell” answer.
SUMMARY
In the big picture, I expect today’s decision to be a non-event in the sense that we won’t get much in terms of new info. We know they will keep rates unchanged. We know Waller, and probably Bowman will dissent. We won’t get the SEP. And Powell will just reiterate data dependency.
This is all expected and from a trading perspective, it’s new info and changes that offer good opportunities. If we get deviations from these expectations, then we should have some nice opportunities.
POTENTIAL SURPRISES
The biggest surprise (and a hawkish one) would be Waller voting to keep rates steady. This would highly likely trigger a rally in the US dollar and a selloff in the stock market and gold. On the bond market side, it would be trickier, but we might see lower long term yields as the market prices out the inflation risk premium.
Another hawkish surprise would be Powell categorically excluding a rate cut in September by saying something like “I don’t think we will have enough information by then”. In the short term, it would be a hawkish surprise and asset prices will have to reprice but then again, if the data comes out weaker than expected, the market will price back in a rate cut in September (and probably even a third cut given that at that point the Fed will be seen late).
In terms of dovish surprises, the biggest one would be a third dissenter. In this case, the stock market will likely rally while the US dollar would fall. I would also expect long term yields and gold to rise on higher inflation risk.
Another one could be Powell saying that they could cut more than twice by year-end or deliver a 50 bps cut in September in case the data comes out weaker than expected. This would be a weaker version of the third dissenter, but it would still be interpreted as more dovish than expected
