FOMC Meeting Preview: Dovish Pricing Too Aggressive?


The Federal Reserve starts its two-day meeting today culminating in a statement at 1800GMT tomorrow evening followed by Chair Powell's press conference. There will be no dot plots or forecasts until the September FOMC meeting.

The market assigns a 100% probability of an interest rate cut. This will be the first move lower in rates since the financial crisis and comes after seven rate hikes. While some market participants continue to argue the case for a more aggressive 50bp move, we note that even the most dovish members of the committee, such as St Louis Fed President James Bullard, have expressed scepticism over a such a cut, so this looks highly unlikely.

Chair Powell has spelled out that the Fed is willing to ease if necessary because of low inflation, slowing global growth and the potential negative impact of trade wars. He also stated that the Fed would act as appropriate to ensure the continuation of the economic expansion, a departure from its normal mission.

Powell has also said he agreed with the general principle that it is better for central banks to act preemptively and not let a downturn gather steam. “The thought being, an ounce of prevention is worth a pound of cure,” he said recently.

Essentially, the FOMC remains data dependent and since the last meeting, that economic data has been largely solid with GDP growth relatively healthy and core PCE inflation rebounding. We have also seen a debt ceiling and funding agreement, whilst trade tensions have abated since the resumption of talks after June's G20 meeting. 

As we said before the previous FOMC meeting, Powell and the Committee face a conundrum between a domestic economy humming along at still above trend growth and labour growth, against weakness in forward-looking indicators (particularly for manufacturing) and softening growth abroad. 

It will therefore be interesting to see if the unity of the FOMC behind Powell that has existed so far begins to break apart. For example, two or three dissenters would tell us that there’s a bigger uncertainty around the path of future rates than what the market is currently anticipating.

Key will also be whether Powell states that policy is not on a predetermined path and so to what extent the Fed signals additional easing steps beyond what was signalled in June. As we said earlier, there are no forecasts or dot plots at this meeting, so all eyes will be on Powell's press conference. The risk is that it could run counter to market hopes that the Fed will seek to reaffirm market pricing for two more rate cuts this year.

Here are the numbers to know ahead of the meeting:

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