Rate cut, dot plot, economic forecast, press conference! What are the highlights of the Fed tonight? | Free report

At 2 a.m. Beijing time on September 19th, the Federal Reserve will announce its interest rate decision for September. This week, the FOMC meeting of the Federal Reserve is shrouded in an unusual mysterious atmosphere. Although the market has long priced in a rate cut by the Federal Reserve, the debate over the magnitude of the rate cut has not been resolved until just 12 hours before the rate decision is announced.

Federal Reserve observers and traders are uneasy, and the market is filled with uncertainty, which will lead to a greater market impact than ever when the mystery is unveiled.

Table of Contents

I. 25 or 50 Basis Points Rate Cut?

II. What are the highlights of the quarterly updated dot plot and economic forecast summary?

III. What will Powell say at the press conference at 02:30?

IV. What are the impacts of the rate cut on the US dollar, US stocks, and gold?

25 or 50 Basis Points Rate Cut?

Since the last rate hike in July 2023, the Federal Reserve has kept its benchmark federal funds rate between 5.25% and 5.5%. This is the highest level in 23 years, despite the Fed's preferred PCE inflation gauge dropping from 3.3% to 2.5% and the unemployment rate rising from 3.5% to 4.2% during this period, the interest rate level has remained unchanged.

In recent weeks, even Federal Reserve Chairman Powell has unequivocally hinted that the September meeting will see a rate cut in this cycle. However, the derivatives market has been unstable in pricing the magnitude of the rate cut the Fed will take. Until late last week, traders had been locking in a 25 basis points rate cut. However, the market sentiment changed dramatically on Friday, leading to expectations of a 50 basis points rate cut on the "negotiating table." As of Wednesday afternoon this week, the probability of traders pricing in a 50 basis points rate cut exceeded 60%.

"I hope they cut by 50 basis points, but I doubt they will cut by 25 basis points. I hope it's 50 because I think rates are too high." said Mark Zandi, Chief Economist at Moody's Analytics.

"They have achieved full employment, and inflation has returned to target levels, which is inconsistent with the target range of around 5.5% for the federal funds rate. So I think they need to normalize rates quickly and have a lot of room to do so."

However, many on Wall Street still believe that the Fed's first step will be more cautious. "While the tightening policy seems to be working, it has not gone entirely as they expected, so loose policy should be viewed with the same level of uncertainty," said Tom Simons, an economist at Jefferies, "So if you are unsure, you shouldn't rush."

Analysts believe that the debate inside the FOMC meeting room should be interesting. Decisions made by the Federal Reserve are usually unanimously approved, but this time there may be an unusually divergent opinion. "For the Federal Reserve, ultimately it's about deciding which risk is greater - reigniting inflation pressure by cutting rates by 50 basis points, or threatening economic recession by cutting rates by only 25 basis points," said Seema Shah, Chief Global Strategist at Principal Asset Management.

"Some strategists believe that a 25 basis point rate cut by the Federal Reserve would be a more welcome signal. Some Wall Street insiders also point out that a 50 basis point rate cut may signal a more ominous state of the U.S. economic health than the Federal Reserve intends to portray."

Eric Wallerstein, Chief Market Strategist at Yardeni Research, deduced that "in the absence of an economic recession or financial crisis," the Federal Reserve will not cut rates by more than 25 basis points. "For anyone calling for a 50 basis point rate cut, I think they really should reconsider the volatility that may arise in the short-term funding markets," Wallerstein stated.

"A 50 basis point rate cut would smell of panic, and we are now almost entirely behind the curve," analyzed Jennifer Lee, Senior Economist at BMO Capital Markets.

"Goldman Sachs expects the FOMC to cut rates by 25 basis points, while emphasizing risks in the labor market." This meeting will provide the latest economic forecasts and dot plot, reflecting a cautious yet structured view on future rate cuts, consistent with maintaining economic stability amidst evolving labor market dynamics.

Dot Plot and Latest Forecasts

The Federal Reserve releases a dot plot quarterly, showing the FOMC participants' forecasts for the future interest rate path. "In this meeting, the Federal Reserve will unveil the latest dot plot. Additionally, the Federal Reserve will adjust its forecasts for the economy, inflation, and unemployment rate."

The June dot plot indicated that FOMC participants only intend to cut rates once before the end of the year. It is widely believed that "the latest dot plot will certainly increase rate cut expectations." The Federal Reserve may increase the number of rate cuts in 2024 (1 cut was expected in June), but not as aggressively as the market expects, i.e., cutting rates by 100 basis points by the end of the year. Based on the June forecast, the median rate in the 2025 dot plot is 4.1%, with 15 FOMC members expecting the federal funds rate in 2026 to be above 3.0%, still higher than the Federal Reserve's estimated long-term neutral rate of 2.8% (the level that neither stimulates nor restricts growth).

June 2024 Dot Plot Due to the slight slowdown in economic activity and continued positive job growth, the Federal Reserve may maintain a gradual rate cut approach. However, if employment or growth momentum stalls, the Fed will maintain its rate cut firepower. Given market expectations, the less aggressive prospect of Fed rate cuts may trigger some volatility.

In terms of forecast adjustments, the biggest adjustment may come from the unemployment rate, as FOMC participants are almost certain to raise the unemployment rate from 4.0% in June. The US labor market has slowed down, with the unemployment rate steadily climbing to 4.2%, and job growth slowing down. The 3-month moving average of monthly non-farm payroll additions has slowed from 267,000 in March to 116,000. Due to the unemployment rate being higher than the Fed's forecast in June for the end of 2024 (4.0%), it is expected to be slightly raised in the next two years.

Regarding inflation, FOMC participants projected a full-year core inflation rate of 2.8% in June, which may also be revised downwards as the latest data for July has already decreased to 2.6%. Thanks to the drop in oil prices, the decline in inflation is faster than the Fed's expectations, so it is expected that their inflation forecasts for 2024 (2.8%) and 2025 (2.3%) in June will be slightly lowered.

"Inflation seems likely to be lower than the FOMC's June forecast, and the higher data at the beginning of the year increasingly looks like residual seasonal effects rather than a re-acceleration. Therefore, a key theme of the meeting will be shifting the focus to labor market risks," Goldman Sachs economists said in a report.

In terms of economic growth, so far, the US economic growth has remained stable, thanks to slowing but still robust consumer spending. In fact, the latest estimate for GDPNow for the third quarter by the Atlanta Fed is 3%, with almost no signs of an economic recession. As economic growth is still slightly above trend levels, the Fed may raise its growth forecast for 2024 (2.1%) this time, while keeping the 2025 growth forecast (2.0%) unchanged.

Highlights of Powell's Press Conference

A regular survey of fund managers by US banks shows that only 11% of investors believe the US economy is heading for a hard landing, while 79% of respondents still expect a moderate slowdown. Therefore, the direct challenge facing the market is focused on Powell's communication skills, as he will face a tough test during the Q&A session after the press conference. Powell's press conference will start at 2:30 am, and Jin10 Data will provide live Chinese interpretation throughout the event.

Analysts expect that Chairman Powell will adopt a dovish tone at the press conference to balance market optimism. While Powell will not fully commit to the pace of future rate cuts and reiterate his reliance on data, he is expected to emphasize that the slowdown in the US labor market (slow hiring, declining job vacancies), weak consumer demand, and easing inflation pressures are consistent with the Fed's prospects for further rate cuts. **

At the press conference, the market also expects Powell to emphasize his views at the Jackson Hole meeting, pointing out that the slowdown in the labor market is "clear and unmistakable," and the labor market no longer exerts inflationary pressure on the economy. He may emphasize that the Fed will "make every effort to support a strong labor market," and may also emphasize that if the economy or labor market shows excessive weakness, the FOMC is ready to ease monetary policy by more than 25 basis points at any time, opening the door to larger rate cuts in November and December.

"I expect Chairman Powell and the FOMC to commit to gradually stepping down the monetary policy ladder at the press conference... Of course, there is a risk of further cooling in the labor market, but I believe reigniting price pressures is a more serious danger," said José Torres, Senior Economist at Interactive Brokers.

Market Impact

The US dollar index has fallen by about 5% from its peak in early July. During this period, the two-year US Treasury yield has dropped by nearly 100 basis points, with the curve steepening in a bull market. The trends of these two instruments look completely consistent, and the looming issue for the forex market at the upcoming FOMC meeting is whether the dollar is facing another round of selling pressure.

If the Fed only cuts rates by 25 basis points in September and the dot plot is less dovish than currently priced by the market, all of this will tend to support a counter-trend rebound in the dollar. However, ING International Netherlands expects that such a rebound will be short-lived. The bank anticipates that Powell will appear quite dovish at the press conference, and he now has more reasons to maintain a dovish stance than earlier this year.

If the Fed can cut rates at its discretion in the context of a soft landing, rather than being forced to cut rates, it will be unfavorable for the dollar. Risk assets will receive relative support, and the dollar will begin to be in a more bearish position on the dollar smile curve.

ING International Netherlands believes that forex traders will continue to express their views on lower US rates through the USD/JPY pair. This currency pair is one of the most sensitive to US rates, with the yen boosted by falling oil prices and prospects of a rate hike by the Bank of Japan. It can also act as a hedge if the US stock market reprices due to weak growth prospects. The bank believes the dollar will weaken before the US election in November, with the post-election trend depending on the situation.

It is worth noting that some strategists warn that a larger rate cut may put US stocks in trouble, while a rate cut lower than expected may actually be positive.

Eric Wallerstein, Chief Market Strategist at Yardeni Research, believes that if the total amount of rate cuts by the Fed this year is lower than expected by the market, it may not necessarily be a bad thing for the stock market. He said:

"If interest rates are repriced due to stronger-than-expected growth, with a strong GDP in the third quarter, decent labor market indicators, and continuous increase in consumer spending, then as profits continue to grow, stocks will have greater upside potential."

From an industry perspective, defensive sectors have performed well in recent weeks as the decline in long-term interest rates has boosted them. However, as much of the decline in long-term interest rates has already occurred, investors should not chase performance in these sectors as many positive news have already been priced in.

Regarding spot gold, the relationship between interest rates and gold prices has historically been inverse, with lower rates typically supporting higher gold prices. Therefore, as the Federal Reserve prepares to cut rates, many analysts remain bullish on the outlook for gold. However, several factors need to be considered when predicting the potential trajectory of gold prices in this new economic environment.

Firstly, the expected rate cut is likely already partially reflected in the market. Therefore, the impact of the Fed rate cut on gold prices this week may not be as significant as expected. Gold prices are also influenced by various factors, with the strength of the US dollar, global economic growth prospects, and inflation expectations all playing a role in the trajectory of gold prices.

While the upcoming Fed rate cut may not directly impact the trend of gold prices, many analysts believe that there is still room for further upside in gold prices in the coming months. For example, analysts at Goldman Sachs expect a target gold price of $2700 per ounce by early 2025, while other experts anticipate even greater price increases in the coming months