Today the Fed is expected to finally restart its journey towards the neutral rate after the last cut in December 2024. Let’s see what’s priced in by the market and what kind of surprises could trigger a repricing in expectations.
Statement
The Fed should acknowledge the weakening in the labour market while maintaining the lines about elevated inflation and uncertainty. No change to QT. In terms of votes, we should see a majority of participants voting for a 25 bps cut with two or three participants voting for a 50 bps reduction (Miran, Waller and Bowman). There might also be one participant voting to hold the rate steady (Schmid).
Potential surprises:
- 50 bps cut (very dovish)
- More than three members voting for 50 bps cut (dovish)
- No cut (very hawkish)
- No dissents for 25 bps cut (slightly hawkish)
- Only Miran voting for 50 bps (slightly hawkish)
*Note that whatever Miran does or says from now on, will likely be ignored by the market because of his political appointment.
Dot Plot
At this meeting we also get the Summary of Economic Projections (SEP). The focus will be on the dot plot and it will be compared to the current market pricing since this is what’s priced in. The market is pricing a total of 148 bps of easing by the end of 2026, with 68 bps in 2025. Therefore, the market is expecting 3 cuts in 2025 and 3 cuts in 2026. In June, the Fed projected 2 cuts in 2025 and 1 cut in 2026. The Fed is expected to match the market pricing for 2025 but could be more hawkish for 2026 by projecting just one or two cuts.
Potential surprises:
- Just one more cut in 2025 and anything lower than three cuts in 2026 (hawkish)
- Two more cuts in 2025 and four cuts in 2026 (dovish)
- Three more cuts in 2025 and three cuts in 2026 (very dovish)
Press Conference
This is where things will get interesting and where it’s harder to really get a consensus, but most agree that Powell will put more focus on the labour market given the recent weakness. Nonetheless, we have Powell’s Jackson Hole Symposium speech as the baseline
