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Reducing the key rate range by a quarter of a percentage point can be considered a decided matter, which, in general, the markets do. However, in reality, anything can happen. If the Fed does not meet the expectations of investors, then hysteria will begin.
By the way, the owner of the White House has already demonstrated his emotional attitude towards the future decision of the Federal Reserve. Donald Trump ordered to definitely lower rates, and more aggressively. It is not yet clear what the central bank will do, while the dollar missed the next tweet of the US president and continued to grow. Currently, the US currency remains the most profitable among its main competitors.
Given the steady growth of the US economy, record low unemployment and restrained inflation, the FOMC members will have to give a kind of "preventive coloring" to the policy easing. The fact is that the rate cut by 25 bp will not provide the necessary insurance for the economy. If the goal is only to normalize the yield curve (we are talking about reducing the yield on short-term bonds below long-term issues), then probably reducing the rate by a quarter of a point will help. The difference in rates for 3-month and 10-year Treasuries has narrowed to about this value.
However, trying to get away from recession does little to stimulate the economy. Investors are not just waiting for further rounds of monetary policy easing. The probability of lowering the rates at the September meeting to 1.75–2.00 is estimated at 70%. In December, the chances of falling to 1.50–1.75 or below exceed 50%.
Time to act
The response of traders to the decision on rates will depend on the text of the FOMC statement. And first of all, on how Jerome Powell explains the position of the Committee representatives. A hint of further easing will be found in his comments, in which attention will be paid to pressure factors and economic risks, especially against the background of a trade war.
If the Fed understands that easing by 25 bps will not be enough, why not get ahead of events and reduce rates by 50 bps at once. Such a bold decision will be effective and will provide the central bank with sufficient insurance to support growth. Nothing of what the Fed is going to do in the coming days will be able to accelerate inflation to a target of 2%, while an easing by 50 bp could be a catalyst for price growth.
I don't think Powell would take that step. The only thing that traders should hope for is that it will allow further policy easing.
Recently, Jerome Powell often changes his views. At first, he advocated a tightening of the policy, then it was time for a "wait-and-see" position and stable rates, and now he practically guarantees a reduction in rates. What is this - impermanence or intrigue?
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