And so it is for Jerome Powell’s Fed, evidently, It’s time to cut rates.
After the Swiss National Bank of Switzerland, which anticipated both the ECB and the Fed, after the ECB itself, which has already moved with two cuts, the Bank of England and other central banks, even the Federal Reserve will decide to cut the cost of money to try to give a boost to the economythat of the United States which, although it is not struggling to keep up with the pace of the European one, has recently presented some pockets of vulnerability, particularly in the labor market.
A few hours after the verdict of the FOMC, the monetary policy arm of the Fed, Analysts and traders still can’t agree on how big the first cut in more than four years, starting in 2020, will bewhich will lower rates from the 23-year high they are currently at, or to their current rangebetween 5.25% and 5.5%.
If you want updates on Central Banks Enter your email in the box below:
By completing this form I agree to receive information relating to the services on this page in accordance with the privacy policy.
Fed Towards Rate Cut. Powell’s Decision agonizes
Table of Contents
If last week, despite the various appeals in favor of a 50 basis point cut, the large audience of economists had resigned themselves to the‘hypothesis of a reduction of just 25 basis points in euro area rates by the ECB by Christine Lagarde – as it was in fact – without even contemplating the scenario of a more significant cut, The unknown factor remains high on the Fed:
Powell to announce a 25 basis point cutpractically giving a little something to Wall Street and the entire global stock market, or will he opt for a reduction of 50 basis points, but thus risking, in spite of himself, ringing an alarm bell and therefore frightening the markets?
L’side effect of a 50 basis point cut It has been well studied by some strategists and economists, who have warned that, with and Jumbo Cut, The Fed would send the following message to the markets:
‘The American economy is in pretty bad shape, perhaps worse than you think and fear’.
At that point, investors could react by triggering an avalanche of selling on Wall Street.
That said, a wave of selling could overwhelm Wall Street even if the Fed announced a 25 basis point cut:
in this case, in fact, the most dovish expectations would be dashed and the disappointment of the missed Jumbo Cut could trigger a wave of sell-offs.
Are Wall Street sell-offs inevitable? We will only know at 8pm Italian time, when the monetary policy arm of the Fed, the (Federal Open Market Committee) will publish the statement announcing its monetary policy decisions.
At 8.30pm, Federal Reserve Chairman Jerome Powell will speak. in the usual press conference following the announcement.
READ ALSO
Markets, Dalio (Bridgewater): Forget the Fed, Watch Out for China
Fed, here we are: rate cuts but without US recession. Wall Street says -50 bp risking disappointment sell-off. BlackRock’s attention
Fed Rates, Jumbo Cut? What’s Pricing the US Dollar
So it’s a crucial day for Wall Street and markets around the world. By the way, today there will not be ‘only’ the rate announcement.
The US central bank will also communicate its own updated forecasts on the trend of US GDP and inflation, also publishing he dot plot, or the graph from which the outlook on the expected direction of interest rates for the future emerges, churned out by individual members of the FOMC.
While waiting for the string of announcements, an important signal comes from the person directly concerned by the Fed’s announcement, in addition to Wall Street, the Treasury market, gold and many other assets, or from the US dollarmore precisely from its trend compared to other currencies of the main world economies.
The euro is currently rising against the dollar around at $1.1125, up 0.10%oscillating at levels not far from this year’s high (the low of the year for the US dollar), tested around $1,1201.
The dollar suffers significantly especially on the yen which, as several experts point out, cannot fail to rise, as the Bank of Japan led by Kazuo Ueda can only continue to raise rates (although it is not certain that he will raise them this week, or if he will decide to wait even longer, after il first historic act of Marchwhen he announced the end of the era of negative rates, and the other monetary tightening, which brought the cost of money jumps to a record high since 2008).
Own the prospect of a Bank of Japan forced to shed its role as one of the world’s most dovish central banks have led the yen to make continuous gains against the dollar, having gained as much as 12% against the US currency in the last three months.
The dollar’s decline against the yen continues today, triggered in particular by the prospect of a 50 basis point cut by the Fed.
The report USD-JPY thus retreats in view of the Fed’s announcement by more than half a percentage point, falling and JPY 141.56.
READ ALSO
Rates: Fed ready to cut them, but the puzzle remains on Wall Street. The ECB hawk burying hopes
Central Banks, Not Just the Fed: BoE and BoJ Meetings Coming Up
And it is always also the rekindling of bets on the arrival of a 50 basis point rate cut in the United States which is making its effects felt on the relationship GBP-USD, which today also prices in the still persistent inflation in the United States, jumping by almost half a percentage point against the dollar, to $1.3218.
Would 25bp rate cut help the dollar?
Already weakened by the Fed’s rate bets, the greenback has been on strategists’ radar for some time, due to the implications that a further weakening of it pcould have not only on forex but also on other assets: a further decline following today’s announcement cannot be ruled out, as Nathan Swami, head of Citi’s forex trading division in Singapore, commented to CNBC. especially in the event of dovish tones from Powell.
On the other hand, the dollar could be supported from a rate cut by the Fed of 25 basis points: now that the bet is mainly and again on a reduction of 50 basis points, a cut of 1/4 of a percentage point could be considered almost hawkish, supporting the American currency.
This is what he says Enrique Diaz-Alvarez, Chief Economist di Ebury who, in pointing out that the probability of a jumbo cut has reached over 60%, spoke of “excessive expectations”, confirming the “forecast of a 25 basis point cut”, and adding that “a 25 basis point cut and a cautious, data-dependent outlook for further cuts could provide at least temporary support for the dollar.”
He also spoke of temporary support for the US dollar Francesco Pesole, forex strategist at ING that, in a note dedicated to the Fed announcement wrote that a 25 basis point rate cut by the US central bank would give a boost to the currency, but only a short-lived one.
The note shows that analysts estimate for today what they define as a “25 basis point dovish cut”, reiterating the risk the Fed would run in announcing a 50 basis point reduction: that of triggering panic on Wall Street.
“Chairman Jerome Powell – Pesole stressed – should provide solid macro justifications for a 50 basis point move, to avoid appearing too sensitive to market expectations”.
Powell would also have to demonstrate, if he opted for the Jumbo Cut, that he made a choice. not dictated by “panic”, that is, by the concern about the risk of a recession in the United States and the conditions in which the labor market is. Otherwise, Wall Street could suffer a lot.
“If he fails to give these reassurances, Fed could cause turbulence in stocks,” that is, on Wall Street and beyond, the expert continued.
For their part, in their Global Outlook for the fourth quarter of 2024, Market 360, BNP Paribas analysts wrote that they expected “a broadly weaker dollar,” citing among the factors the easing of the Fed’s monetary tightening as well as, according to what emerges from the BNP Paribas US landing dashboard“a moderate risk of recession in the United States.”
The same experts, however, also warned of the presence of “upside risks” for the dollar, which would manifest themselves in the event that “a potential Trump presidency could lead to much higher trade tariffs.”
David Pascucci, XTB analyst, he also recalled that “the reaction of the dollar will influence” – and is already influencing – “gold, oil and the currency market”.
Pascucci referred to the “depreciation trend” of the US currency, which currently sees “gold rising, oil embarking on a short-term recovery path after the lows seen recently (recessionary trend) and a currency market currently driven by major stocks appreciating against the dollar, first and foremost the yen, a currency that underpins an economy that sees future rate increases.”
READ ALSO
Gold: After Record Waits for Fed, Goldman Can Still Rise
Rate cuts in 2024: what the markets are betting on
Pending the Fed’s verdict, XTB analyst David Pascucci reviewed traders’ expectations for today’s Fed move, also presenting Markets are betting on what Powell will do in upcoming meetings:
“In June, there was talk of only one cut by the Fed in 2024” – the analyst recalled, adding that expectations then rose to “two cuts” over the following months, until reaching now, with “expectations completely misaligned by a soft approach taken into consideration until recently”.
“Indeed, looking at the numbers from the FedWatch Tool – explained Pascucci – we can see how for the meeting of November 7th approximately 80% of operators expect at least a cut of 0.75% (4.5-4.75%) compared to current levels. This means that if today you cut by 0.25%, next time you would cut by another 0.5%”.
“Looking at the data from the December 18 meeting, 92% of operators expect a cut from current levels of 1% (4.25-4.5%) while the relative majority of 58% expect a cut of at least 1.25% (4-4.25%)”.
“Looking at these numbers, the operators 4 or 5 rate cuts of 0.25% are expected by the end of the year, a real start to a cycle of rate cuts”. Something unimaginable, certainly at the beginning of 2024, when it was called into question there had even been the hypothesis of only one reduction by the Fed during the year.
In today’s note dedicated to the dollar, ING also had its say on what will be The Fed’s next rate moves at its upcoming November and December meetings.
While waiting for the dot plot, experts wrote that they predict that “the median value of the cuts (expected by FOMC members) will indicate total reductions of 75 basis points for 2024 and another 125 basis points cuts next year”. Forecasts that will demonstrate once again how the markets have been too dovish, given that at the moment The priced assumptions are for cuts of 115 basis points and 135 basis points for 2024 and 2025 respectively.
Moreover, “if accompanied by a dovish press conference, this projection will hardly be able to prevent further dovish deviations,” they warned from ING.
What factors is Jerome Powell considering in deciding whether to cut interest rates?
It’s Time to Cut Rates: Jerome Powell’s Fed Faces Crucial Decision
The stage is set for Jerome Powell’s Federal Reserve to make a highly anticipated decision that will have far-reaching implications for the global economy. After the European Central Bank (ECB) and other major central banks have already made moves to cut interest rates, the Federal Reserve is expected to follow suit to give a much-needed boost to the US economy.
The labor market in the United States has shown pockets of vulnerability, and the Fed is under pressure to act to prevent a slowdown. The question on everyone’s mind is how big the rate cut will be. Will it be a modest 25 basis point reduction or a more significant 50 basis point cut?
The Agony of Jerome Powell’s Decision
The Federal Open Market Committee (FOMC) will announce its decision, and Powell will hold a press conference to explain the rationale behind the move. The stakes are high, and the markets are on edge. A 50 basis point cut would be seen as a bold move, but it risks sending a signal that the economy is in worse shape than thought, which could trigger a sell-off on Wall Street.
On the other hand, a 25 basis point cut might be seen as too little, too late, and could also lead to disappointment and selling. The Fed is walking a tightrope, and the outcome is far from certain.
The Dollar’s Fate Hangs in the Balance
The US dollar is already under pressure, particularly against the yen, which has gained 12% against the US currency in the last three months. The prospect of a 50 basis point cut by the Fed has further weakened the dollar, and the euro is currently rising against the dollar around $1.1125.
The dollar’s decline against the yen
