FOMC rate decision: How to trade the event

How will the market likely react? The recent hot data points across CPI and PCE combined with the US economy still consistently growing just below trend growth could force Powell to make a hawkish pivot. However, with the market momentum leaning in that direction, the real surprise lies in a dovish interpretation, if Powell reiterates the Fed’s forecast for three rate cuts, which would likely cause a significant risk-on sentiment across all asset classes and ease global financial conditions through a weaker USD. The most important hawkish message since last meeting has come from Austan Goolsbee saying that “progress on inflation has stalled” which means that the economy has adjusted to the current level of interest rates without solving inflation in a meaningful way. There are not many data points that point in favour of a cut, but the strong USD could cause a negative boomerang effect into the US economy through financial instability in the Asian region. In any case, while no rate change is expected the press conference will still be a key event that will impact markets. Read Althea Spinozzi’s, Head of Fixed Income Strategy, FOMC preview.

The table below shows our views ahead of the FOMC meeting.

Why does it matter? The FOMC meeting is crucial for markets as it sets monetary policy, impacting interest rates and investor sentiment. Decisions made here shape economic expectations, influencing asset prices globally. Earlier this year, the market was pricing as many as seven US rate cuts, but recent inflation reports showing persistent inflation have caused the market to now only pricing in one rate cut in 2024, scheduled for November.

The chart below shows the Bloomberg Economics Federal Reserve sentiment natural language processing (NLP) model. The index is underpinned by an NLP algorithm trained on Bloomberg News headlines, covering about 6,200 speaking engagements by Fed officials since 2009. Values below zero indicates that a rate cut is imminent. The recent direction in Fed speeches have been that of higher for longer and some non-voting member Dudley has sounded particularly hawkish saying the market is completely wrong on inflation long-term.