Fed Rate Cut Expected, Market Focus Shifts to Policy Guidance

Traders and economists confidently expect the Fed to reduce interest rates by 25bps to the 4.25-4.50% range. The Summary of Economic Projections and any Powell comments about a prolonged “pause” to the interest rate cutting cycle will be the potential market moving releases. EUR/USD has carved out a narrow range between 1.0470 and 1.0600 and unless the Fed delivers a meaningful surprise of some sort, that range may carry over.

With a 25bps interest rate cut essentially fully discounted, this aspect of the FOMC meeting will not be a significant market mover in and of itself; instead, traders will key in on the central bank’s monetary policy statement, Summary of Economic Projections (including the infamous “dot plot” of interest rate expectations), and Fed Chairman Powell press conference.The biggest question traders will be asking is whether the Fed will maintain the pause in January (~80%+ per CME FedWatch), or if they will make a move in March (~40% implied probability). One big uncertainty for Jerome Powell and company is the potential changes that Donald Trump’s second term will bring. Specifically, the potential for expansionary fiscal policy from an extension of the tax cuts, easier regulation, protectionist trade policy, and reduced immigration could all impact inflation and the jobs market, and by extension, Fed policy in the years to come. At the margin, this uncertainty may push the committee to be more cautious with future decisions until the proverbial “lay of the land” is better understood, and it could lead to a slower reduction in interest rates to avoid a potential acceleration of inflation. Another key aspect of the meeting to monitor will be the FOMC’s Summary of Economic Projections (SEP

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