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FOMC Meeting: Time to Announce Cuts?

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Time is running out for the Fed, if it’s going to match the market’s rate projections for this year. If it doesn’t, then the dollar and US equities could get riled up this week. Given the anticipation for rate hike starting soon, tomorrow’s FOMC meeting could be pivotal for the markets. Not because there are changes in policy expected, but because it would be time to start preparing the market for the next rate cut.

The markets are effectively agreed that the Fed will keep its policy unchanged after the meeting that will run from today to tomorrow. The issue is that futures markets are pricing in more than a 50% chance that the FOMC will cut rates at the next meeting.

It’s All About the Communication

Usually, the Fed doesn’t like to surprise markets with a shift in policy like that. Which means that in order to meet those expectations of a cut for the March meeting, the Fed would have to communicate that a rate hike is coming at this meeting. That could happen in the accompanying monetary policy statement. Or, what’s more likely, is that Fed Chair Jerome Powell could suggest that it’s a possibility during his post rated decision presser.

If that doesn’t happen, then the section of the market that has already priced in a rate cut for March will likely have to reposition. That could mean the dollar picks up strength and US stocks take a bit of a dive, as simply repeating what was said at the prior meeting would be interpreted as the Fed being hawkish.

Is It Really a Surprise, Though?

The market has long been forecasting the Fed to be a lot more dovish than the Fed actually turns out to be. So, it wouldn’t be exactly all that much of a surprise if the market is pricing in a rate cut before the Fed will actually do it. There is a pretty heavy bias among traders that policy easing is inevitable, and we’re only quibbling about timing now.

So, even if the Fed sticks to its guns on keeping rates higher, the market reaction could be short-lived as traders simply move to forecasting rate cuts at the next meeting. It would likely require a substantial change in the data trends to move the perception of the market. Such as NFP later in the week and then CPI figures. For now, the market appears to be fairly comfortable in believing the data trends point to a substantial amount of easing starting in the second quarter.

What Could the Fed Do?

The official stance of the Fed is that only three rate cuts are likely to be needed this year, as opposed to the six the market expects. Those rate cuts would only start in the second half of the year, according to the Fed. Keeping that stance would likely be interpreted as hawkish by the markets.

Options that the Fed has in order to communicate more dovishness include striking any mention of “policy firming” from the statement. This would likely be seen as the Fed disclosing its “pivot” away from a hiking bias to being open to cutting should the data suggest it. Powell could also not talk about the need for “firmer” policy, and could go so far as to suggest that some “easing” might be appropriate at some time. All of that could be seen by the market as a sign that a rate cut is coming at the next meeting. Which means the other section of traders who expect no cut will have to reposition, likely weakening the dollar and boosting equities.

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