FOMC Sept'19 meeting Preview - Fed all set to cut rates by 25bps

The Fed is expected to deliver a 25 bps rate cut tonight pushing the Fed funds rate to 1.75%-2.00% range from the current range of 2.00%-2.25%. Continued weakness in the supply-side of the economy along with the core PCE inflation remaining below the 2% target could work as important factors for the Fed to justify the need for more accommodation.  We expect that no substantial changes will be done to the projections on GDP growth, core PCE defaltor and the unemployment rate.  

The ‘dot plot’ is expected to move lower. In the June policy meeting (last time when dot plot was released), the median of the FOMC members saw status quo in 2019 as the base-case. However, given that 25 bps cut was delivered in July and another 25 bps is expected today,
 we expect at least a 50 bps lowering in the dot plot. The ‘dot plot’ is also expected to show a very divided FOMC. It is expected that at least 3-4 members may dissent this time to cut rates. It is also pertinent to note that Fed future rates is expecting another 25 bps rate cut by 2019-end with a probability of 60%.

We do not think that the FOMC will raise concerns about the inflation outlook in response to recent developments in Saudi Arabia given that it will want to understand the duration of the disruptions before it provides a definitive comment on the matter.

We expect Powell to highlight the three themes listed in the July minutes about why they cut rates: uncertainty from the trade war, the global outlook, and low inflation. The last seems to be fading in intensity, but the first two are more pressing given the Trump continuous rhetoric.

The biggest risk tonight
 is that we see some kind of balance sheet hint or announcement of keeping a backdoor QE given the dollar funding crunch prevalent in the last few days and last evening Fed announcement of a overnight repo auction which was later cancelled. If that's the case, the market will give the dollar a royal treatment.


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