Focus on the Federal Reserve's First Rate Cut Since Covid
The spotlight this week is on the Federal Reserve and its first rate cut since March 2020, when Powell took rates to zero in response to the global covid shock. The key question is whether it will be a 25bps or 50bps rate cut. Amid a 36-hour monetary roller coaster mid-week, policy decisions will also be made in Brazil, South Africa, the UK, and Japan, but these are less significant compared to the Fed.
Speculation on the Rate Cut
Last week, DB's Jim Reid suggested that if the Fed was to cut rates by 50bps on Wednesday, a media leak would likely be needed as we approached or entered the weekend. Articles in Thursday's WSJ and FT did not definitively point to a 50bps cut, but they suggested the likelihood was higher than it was after Wednesday's slightly firmer CPI report. It's unclear how informed the WSJ article was, but the same author, Nick Timiraos, had previously written a strong endorsement of a surprise 75bps hike just before the June 2022 FOMC, which significantly shifted the market at the time. There was little doubt that this was well informed. DB economists and strategists used the bank's proprietary AI tool to analyze both WSJ articles (2022 vs 2024) from this same author, and it indicated that "the June 2022 article conveys a strong sense of urgency and conviction regarding the need for a significant rate hike to combat inflation. The September 2024 article, while discussing the possibility of a rate cut, presents a more balanced and less decisive outlook, reflecting the Fed's cautious approach in navigating economic uncertainty". So, although the recent WSJ article could signal that things were closer than we thought, there is no certainty here.
Anticipation for the Fed's Decision
Without any weekend articles that could have been sourced to the Fed, the decision on Wednesday is on a knife-edge, a situation that hasn't often been the case by the time we ultimately arrived at each FOMC in recent years. Usually, it's been fairly obvious that close to the meeting or the Fed have found a way of guiding the market to the eventual outcome. Currently, DB is expecting 25bps, but with market pricing where it is (66bps priced in this morning), and if no Fed leaks push us back towards 25bps over the course of the next 12-24 hours, DB economists could easily move to a 50bps prediction today as they don't think the Fed will want to surprise the market too much on the day. The communication from the Fed will be as critical as the 25 vs 50 debate. Would a 50bps be the start of 50s or a one-off larger move to start the cycle? Would a 25bps mean the bar for subsequent 50s is high? There will be lots to digest. It will be challenging to deviate the messaging too far away from the latest updated Summary of Economic Projections (SEP) and dot plots though. So in many ways, that constrains the messaging unless we see large changes.
DB's Predictions
DB's economists believe the Fed’s growth forecasts are likely to be little changed, but the median core PCE inflation forecast could fall by a tenth or two. They think the unemployment rate forecast will move higher this year – likely into the 4.3-4.4% range – but be mostly unchanged in subsequent years. If the Fed cuts by 25bps on Wednesday, they would expect a median of 75bps of cuts this year, and if they cut by 50bps, they would expect the SEP to reflect 100bps of cuts through year-end.
Other Highlights of the Week
Apart from the Fed, the main highlights are tomorrow's US retail sales and industrial production, Wednesday's US housing starts and permits and UK inflation, Thursday's Bank of England decision, US existing home sales and initial jobless claims, and Friday sees the BoJ meeting, China decide on 1 and 5-yr prime rates, Japan's CPI, and German PPI.
Bottom Line
The Federal Reserve's decision on the rate cut this week is a significant event that could have far-reaching impacts on the global economy. It's a delicate balancing act, and the world will be watching closely to see how the Fed navigates this challenging situation. What are your thoughts on this? Do you think the Fed will opt for a 25bps or 50bps rate cut? Share your thoughts and this article with your friends. Sign up for the Daily Briefing, which is available every day at 6 pm.
