The Federal Reserve and Bank of England announce their latest rate decisions on Thursday, with a rare double dose of two quarter point rate cuts expected on the same day. Both 25bps moves are close to fully priced, though the US election result and last week’s UK Budget have modestly altered the odds. Markets will be looking at forward guidance from Fed Chair Powell and Governor Bailey to determine the future path of rates in both countries.
Fed to stick to its Dot Plot
The FOMC usually delivers what the dot plot says it will deliver for the current year, when it is announced relatively late in the year. The explicit guidance that the Committee provided in the Summary of Economic Projections in September pointed toward another 50bps of cuts in total for the November and December meetings. These in-year dots usually perform well, whereas the median projection for the policy rate further out a year and beyond, tends to perform poorly. A 25bps rate cut on Thursday will take the Fed’s new target range to 4.50-4.75%.
The economy continues to tick along
Recent economic data has been relatively solid with a healthy labour markets and consumers who keep spending. Inflation is falling, though the core PCE measure at 2.7% remains above the central bank’s 2% target. GDP rose 2.8% in the third quarter, which represents a solid lick. Of course, Friday’s NFP data is a worry, but the weather distortions especially, mean the Fed may look through this and wait for more data and a possible rebound.
Fed officials have endorsed a gradual reduction in borrowing costs as inflation risks remain, though the current levels of rates are in restrictive territory. Chair Powell is very likely to say that the data is noisy, but that the broad trends point toward a gradual rebalancing of pressures on supply and demand at the margin. In terms of the dual mandate, Powell is likely to continue to cite progress toward lower inflation. He can still argue that payrolls are growing at a generally somewhat cooler pace so far this year of 170k/month, versus roughly 250k/month over the same period last year.
Election noise and market reaction
Powell is highly unlikely to say anything much about the outcome of the election. He will indicate a willingness to work with whichever administration while focusing upon the dual mandate set by Congress and monitoring policy developments, data, and markets going forward. He cannot speak out on the macroeconomic effects of potential policies because the Fed leaves fiscal policy to elected officials.
There is only around a 20% chance of the Fed pausing in December and not going through with another 25bps rate cut. If a Republican sweep allows for more expansionary fiscal policies going forward, there may be a shorter easing cycle which would entail removing cuts from the end of the forecast, but likely still continuing cuts in the near-term. The dollar will obviously move around on the election result and if Powell baulks at more policy easing, the greenback will get a boost. The flip side and a Democrat win is seen as dollar negative. A dovish FOMC would add fuel to this.
The BoE to act on the Budget?
The MPC is predicted to deliver a 25bps rate cut, taking the Base Rate down to 4.75%. But the odds of further policy easing have shifted since last week’s historic UK budget, which was seen as both pro-growth and inflationary by the OBR. This contrasts with Governor Bailey’s recent comments that “disinflation is happening faster than we expected it to” and the central bank could become a “a bit more activist” in its approach.
The fiscal loosening by the government is not expected to prevent this week’s rate cut. But there’s no doubt it will be interesting to see and hear any comments from MPC policymakers. Headline inflation recently dropped below the bank’s 2% target for the first time in three years. Crucially, services inflation, which rate setters watch very closely, fell below 5%. It is likely to mean the bank pushes to a gradual path of easing, rather than a more aggressive one.
GBP/USD is obviously in the crosshairs of this week’s risk events. There is a zone around 1.30, which has a confluence of levels including the July interim high, the September correction low and a major Fib retracement level (38.2%) of the April to September rise. The 50% mark sits at 1.2862 and the 61.8% at1.2729.