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FOMC: Rate Cut Almost Certain

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The Federal Reserve Bank will be holding its monetary policy meeting this Wednesday.

The central bank is widely expected to deliver another quarter-point rate cut at this week’s meeting.

However, not everything is set in stone. Despite the CME Group’s Fed Watch tool assigning a > 90% probability, there is still scope for the Fed to disappoint.

The expectations for another rate cut come amid softening growth in the labor market and the US economy itself.

The central bank has cut interest rates two times this year in July and September and the Fed funds rate currently stands at 1.75% – 2.00%. Many investors are betting on another rate cut.

Fed funds rate
Fed funds rate

Among those include US President Trump who has been repeatedly calling for the Fed to lower rates and restart the central bank’s QE program.

If the Fed follows through with today’s rate cut, it would echo similar policy moves in 1998. Back then, the central bank delivered three rate cuts amid an expanding economy. The central bank signaled that it was done with cutting rates after the third rate cut.

However, it is unlikely to expect similar moves from the Fed this time.

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FOMC – What Members Think?

The following is a summary of comments from various FOMC members in the run-up to the blackout period.

Boston Fed President Eric Rosengren maintains that there is no need for further rate cuts. Rosengren, a hawk among the FOMC members recently renewed his case against lowering rates.

According to the Boston Fed, the current low rates are more than enough to address the risks to the economy. He said that the US economy remains in a good shape and that further rate cuts are not required.

However, Kashkari, who is not an FOMC voting member said that he would support a rate cut. His comments come amid concerns that the job market was softening.

Loretta Mester, Cleveland Fed President was on the side of a wait and see approach. While supporting the rate cut in July, Mester said that she would prefer to wait and assess more data before supporting a rate cut.

Other doves on the FOMC include St Louis Fed president Bullard. Bullard said that he and his colleagues should think about cutting interest rates. The rate cuts, he said, were required in order to guard against the threats to the economy such as China.

Similar (dovish) views were also expressed by Chicago Fed president, Charles Evans, while vice chairman, Richard Clarida was more diplomatic, answering that the Fed will act appropriately.

Clarida was one of the final members to speak before the start of the blackout period.

Fed’s Forward Guidance

Today’s monetary policy meeting will also include a press conference by Fed chair Jerome Powell. Investors will be closely watching his comments.

The FOMC meeting comes a few hours after the advance GDP report comes out. The US economy is widely tipped to grow at a < 2% GDP growth rate in the three months of September 2019.

This comes at a time when the US labor market, considered one of the strong pillars of growth, is starting to show signs of softening. Meanwhile, manufacturing activity in the United States is contracting for the past two months.

Considering the above, it is quite likely to see a rate cut today. However, the Fed’s forward guidance will matter. Question is whether the central bank is done with rate cuts for the remainder of the year, or will there be another rate cut by December.

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