- The Fed is set to cut rates by 25bps (Hawkish cut?)
- Will the language be sympathetic to more cuts?
- If persistent inflation is brought up, it could be hawkish
- If employment woes are brought up, it could be dovish
The Fed meeting today is set to be an interesting event. The market has priced in an 87% chance for a 25bps cut. This would lower the target range to 3.50%–3.75%. There are outside bets for no change, but there are no real projections for a 50bps cut.
The current Fed dot plot (chart below) shows that FOMC members believe that the main Fed rate could be between 3 – 3.25% by year-end 2026. This will be where some focus needs to be tonight, as any move lower could be bullish for stock markets. The dot plot and especially how many cuts are penciled in for 2026/2027 will give markets their clearest signal yet about what kind of easing cycle the Fed is envisioning.
In the backdrop of the meeting, there is also something interesting brewing. The next Fed chair has not been selected yet. Powell’s term ends in April 2026, and Trump could be set to hire someone more conducive to his ethos. This could mean Fed members might shift their rhetoric to become more dovish (maybe that’s me being skeptical). Bessent is the frontrunner at the moment, even though he has said he doesn’t want the job. But if Trump comes knocking, he may answer the call.
Lastly, we may need to look out of any mention or changes to the QE policy. The Fed may announce some organic balance sheet expansion. This would not be QE in the traditional sense (like after the 2008 financial crisis), but could include purchasing short-term Treasury bills to manage bank reserves in an effort to smooth the financial system’s plumbing, which has tightened in recent months.
