Will FOMC Go Big or Small on Rate Policy?

The September 2024 FOMC meeting is poised to conclude on September 18th, with Fed Chairman Powell’s press conference following. Traders and economists are divided over the size of the rate cut, with 59% odds of a 50bps interest rate cut and 41% probability of a 25bps cut per CME FedWatch.

This week’s FOMC meeting is the most uncertain for traders in 2024, with no clear “leak” or “sources say” story from a reputable financial reporter. There are two scenarios that are likely to hold regardless of the Fed’s decision: abnormal volatility on the initial decision, potentially leading to a large market move as traders adjust their positions.

Fed Chair Jerome Powell will downplay the immediate impact of this month’s rate decision, emphasizing that the long-term path of interest rates (down) is more significant than a quarter-percent adjustment in any given month. For this reason, either a “Dovish 25bps Cut,” where the Fed sets the scene for more aggressive interest rate cuts to offset fears that the central bank is “behind the curve,” or a “Hawkish 50bps Cut,” emphasizing that the larger cut is an initial adjustment and not necessarily a sign of fears about the economy.

Beyond the initial interest rate decision, the Fed’s Summary of Economic Projections (SEP) will be a key factor in how the market interprets the meeting as a whole. Traders will be looking for a signal in the “longer-run” interest rate dots, which show where each Fed member believes is the target interest rate under normal economic conditions.

A 25bps rate cut would likely lead to a kneejerk reaction higher for the US dollar, potentially taking USD/JPY back above the key 142.00 level. Meanwhile, a 50bps rate cut could prompt the established downtrend to resume and take the pair back toward the psychologically-significant 140 level. The Fed’s September 2024 meeting will take place from September 17-18, with the central bank expected to announce its rate decision on September 18. Economists polled by FactSet are predicting rate cuts at the Fed’s November and December meetings, with most forecasting that by May 2025, the benchmark rate will stand between 3% to 3.5%.

A Fed cut may also impact savings accounts and CDs. If rate hikes have a silver lining, it’s that savers have enjoyed high rates on certificate of deposits (CDs) and high-yield savings accounts. Some banks have offered APYs as high as 5%, giving Americans a chance to juice their savings accounts. The Fed is set to decide whether to lower its key interest rate by a typical quarter percentage point this week or an outsized half-point.

The difference between the two possible approaches to the first Fed rate cut since 2020 may sound slight, as Fed officials are expected to launch a flurry of rate cuts now that inflation and job growth are both slowing notably, likely juicing the economy and stocks.

As a result, a small cut could be followed by larger ones in the next few months, and vice versa. However, the Fed’s decision at the end of a two-day meeting Wednesday could move stock and bond markets and reveal whether officials are more concerned about stamping out inflation’s final embers or propping up a labour market that has been cooling too rapidly for most economists’ comfort.

According to Goldman Sachs analysts, the “baseline forecast is for three consecutive 25bp cuts in September, November and December, and an eventual terminal rate of 3.25%-3.5%”.