The Fed decision is expected to feature a rate cut and a lot more. Here’s
The Federal Reserve is poised to deliver its third straight interest rate cut Wednesday, while simultaneously firing a warning shot about what’s ahead.
Following a period of remarkable indecision about which way central bank policymakers would lean, markets have settled on a quarter percentage point reduction. If that’s the case, it will take the Fed’s key interest rate down to a range of 3.5%-3.75%.
However, there are complications.
The rate-setting Federal Open Market Committee is split between members who favor cuts as a way to head off further weakness in the labor market against those who think easing has gone far enough and threatens to aggravate inflation.
That’s why the term “hawkish cut” has become the buzzy term for this meeting. In market parlance, it refers to a Fed that will reduce, but deliver a message that no one should be holding their breath for the next one.
“The likeliest outcome is a kind of hawkish cut where they cut, but the statement and the press conference suggesting that they may be done cutting for now,” said Bill English, the Fed’s former director of monetary affairs and now a Yale professor.
English expects the message to be “that they’ve made an adjustment and they’re comfortable where they are, and they don’t see a need to do anything more in the near term, as long as things play out more or less as they expect.”
Where the full committee falls will be expressed in the post-meeting statement and Chair Jerome Powell’s news conference. Wall Street economic commentary anticipates a tweak in the statement to harken back to a year ago with language regarding “the extent and timing of additional adjustments” that Goldman Sachs expects to reflect “the bar for any further cuts will be somewhat higher.”
In addition to the rate decision and the statement, investors will be watching an update to the “dot plot” of individual officials’ rate expectations; expectations for gross domestic product, unemployment and inflation, and a possible update of the Fed’s asset purchase intentions, with some expecting the committee to pivot from ceasing the runoff of maturing bond proceeds back to purchases.
Many moving parts
As for Powell, his tone “will also likely get across that the bar has risen in his press conference and will likely again make a point of explaining the views of participants who opposed a cut,” Goldman economist David Mericle said in a note.
About that dissent: The October meeting saw two “no” votes on the final statement, one from each side of the rate debate. Mericle said that is likely to happen again, accompanied by multiple other “soft dissents” who will represent divergent views on the “dot plot” that indicates, anonymously, the rate outlook for each of 19 individual meeting participants, a group that includes 12 voters.
While Mericle added that there is a “solid case” for a third cut, there are arguments to be made for both sides.
“It’s a tough meeting, and so they’ll presumably be a few dissents,” English said. “It’s…
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