“The time has come” for Fed interest rate cuts and the time has also come for the FOMC to pull the trigger on either a 25bps or a 50bps move. Wednesday’s decision will be the first time in four years that policymakers have reduced borrowing costs. Their aim is to achieve the widely hoped for “soft landing” of not too fast and not too slow economic growth and subdued inflation. That likely calls for slow and shallow rate cuts, in quarter-point reductions, even though markets are back to a coin flip regarding 25 or 50.
That is due to recent media reports that the Fed is “wrestling” with how aggressively to cut rates. The Fed is now focused on the labour market, which has weakened since July when officials were actually much closer to cutting rates than most perhaps appreciated. That means a smaller quarter point move will disappoint investors hoping for deeper, faster cuts potentially supporting higher equity valuations. That would help the dollar, but much will depend on the fresh summary of economic projections, as well as the dot plot. Wrap that up with Powell’s press conference and it should certainly be volatile with possibly whippy price action.
The Bank of England is expected to stand pat on rates, so not following the plethora of other central bank easing policy again. It is highly doubtful that officials move in a more dovish direction just yet as sticky services inflation and a relatively solid economy give rate setters on the MPC some time to see how the data evolves. Those reasons are behind sterling remaining the leading major currency against the dollar this year. This may not change until lower prices and wage expectations feed into the official figures. We do get inflation data published the day before the BoE meeting. The bank is braced for services CPI to rise in the coming months before falling back into year-end.