Heavy is the head that wears the crown. The Fed has a very, very big decision to make today. A rate cut is all but confirmed but the major question is by how much? They've been suggesting a likelihood of moving by 25 bps since Jackson Hole but market players aren't listening all too intently. Even if that is what is "expected" according to estimates from economists, traders are still pricing in considerable odds of a 50 bps move.
So, what will the Fed do later today?
Either way, someone, somewhere is bound to get disappointed. And as is the case when such emotion seeps into markets, expect there to be plenty in the reaction and some significant moves in the aftermath.
The case for moving by 25 bps has been one that Fed policymakers have been outlining since Jackson Hole. The disinflation process is starting to take hold but still moving rather gradually. And there is some softening in labour market conditions but it still largely fits with their soft landing narrative.
So, why the need to push for a 50 bps move?
Well, this is very much markets trying to signal to the Fed they are behind the curve and get policymakers to do their bidding. They tried kicking and screaming in early August and that didn't work. So, there is a tail risk the carry trade unwind episode could reemerge if the Fed does disappoint certain quarters in the market.
Fed watcher Timiraos contributed to the indecisiveness in markets with his piece last week here. And he added more colour to things yesterday here.
The case in point for a 50 bps move is that the Fed might feel more comfortable in starting off with a bit of a bigger move.
For one, it'll alleviate suggestions that they are behind the curve and need to do more. Secondly, if economic data is to worsen in the weeks ahead, they've at least shown that they are trying to address that in a prompter manner. That as opposed to moving by 25 bps and then not providing much hints about the next move in November.
Nonetheless, the Fed has plenty of ammunition still in the tank. So, to say that they've missed the boat in not moving by 50 bps today and that it is all doom and gloom would be misplaced.
I mean, let's be real. Labour market conditions in the US have shown signs of cooling with some noticeable hiccups or two recently. But other economic data are not screaming out for a significant downturn or recession. As such, a soft landing scenario is still very much valid by all accounts.
If the Fed does stick to its guns, I reckon there will be plenty of kicking and screaming before the week is over. But even if they do make a decision to try and pacify markets, there will be discontent but perhaps not as much given the current pricing. If anything, it'll be dollar bulls that will be cursing their luck in thinking that the Fed has the cojones to step up when it matters.
But we'll see what they do later on in the day. Either way, there will be disappointment no matter what the outcome is.
