The only notable event in the European session was the UK CPI report which came out basically in line with expectations across the board, although the Core Y/Y figure was a touch higher than forecasts. We will also have the Eurozone CPI, but given that it's the Final reading, the market won't care about it.
In the American session, we get the US Housing Starts and Building Permits data which is unlikely to be market-moving as the markets will wait for the FOMC decision later in the day.
18:00 GMT/14:00 ET - FOMC Rate Decision
The consensus among economists/analysts sees the Fed cutting rates by 25 bps. The market is pricing a 61% probability for a 50 bps cut though. The market's pricing a couple of days before the decision is generally a better gauge. Some people say that starting with a standard 25 bps would be better because the economy is still fine, and 50 bps might be seen as panicky.
Central banking is also about risk management though. The market pricing is giving the Fed a nice opportunity to deliver a 50 bps “insurance cut” without surprising. Things would have been much different if we had something like 30% probabilities for a 50 bps cut and 70% for a 25 bps one. In this case, a 25 bps cut would be seen as a "hawkish" surprise by the market and I don't think the Fed wants that.
The Fed didn’t have the chance to see the labour market report last July as the data was released two days later. Maybe, if they had the data a week earlier, we might have seen them cutting by 25 bps back then already and then continuing with 25 bps cuts for the following meetings.
Fed Chair Powell made it clear at the Jackson Hole Symposium that they will not tolerate more labour market weakening and they will do everything they can to keep it strong. Considering everything, starting with a 50 bps cut makes much more sense.
The Fed can then show that it was just an insurance cut via its Summary of Economic Projections and Powell can double down on that at the Press Conference. Speaking of the SEP, the market is expecting the Fed to deliver at least 100 bps of easing by year-end. The Fed can cut by 50 bps and then project two more 25 bps cuts by year-end.
Further out, the market expects the Fed to deliver 150 bps of easing in 2025 which seems too aggressive at the moment. To sum up, I personally expect the Fed to cut rates by 50 bps, but in the end what’s important is that the Fed is finally starting to ease its policy and the magnitude will be shaped by the data in the next months.
