While we wait for the FED...

The big day is finally here, as most of us are focused on tonight FOMC decision and, most importantly, the commentary from Chair Powell on future stance re rate cut, FED balance sheet etc., I thought it would be of help review some of the variables. Few things in recent years have created more expectations and speculations. Probably a football World Cup final beat that.

First, there's a lot of good news from the Fed in the price. Most metrics suggest there is a lot priced in, both in bond and equity markets. No one really expects a rate cut today though, for this reason, eyes and hears will be focused on the wording. The word "patient" is the most expected. The presence or less of this comment will be interpreted as dovish (absence) or hawkish (presence). The vast majority of market participants and economists expecting it to be replaced with a commitment to "act as appropriate" or something similar. Should the Fed retain its "patient" language, expect carnage at the very front end; that would seemingly take July out of the equation, and there are a full 25 bps priced there.

Of course, there's always the chance that there's a catastrophic breakdown in the China-U.S. trade relationship after the G-20

Current rates are set at 2.5% (Federal Funds Target Rate - Upper Bound, to be precise).

The expectations are for a 22.9% probability of rates cut tonight at 7pm and a higher probability of rate cut in all other meetings. It common idea that the FED will cut twice in 2019 (DB is the only forecasting 3 cuts.

Green indicates pressure to raise, red to lower rates

While the real economy, consumptions etc. suggest there is not much pressure yet to cut rates, employment data and finally inflation data lean towards a rate cut.

But the real question is: how much is already priced in? a lot. WIRP implied fwd rate in 2.15 by the July (31) meeting. Attention therefore will be all at the wording of the future guidance. Any deviation from this path it is likely to be interpreted as hawkish.

The interpretation of the DOTS does not help either. Economists seem to have a "maybe they will, maybe they won't" attitude toward the question of whether the 2019 new DOTS will project a cut. Compared to one year ago, the rate projection is way less hawkish already. If a meaningful number of participants (say 6 or more) shift their dots below 2.375%, rates markets may well conclude that others will soon follow. If only 5 dots move, that could be a little difficult to digest, and naturally if only a handful shift lower that will be taken as unambiguously hawkish. There is an ample opportunity for confusing initial reactions

Another potential area of legitimately dovish surprise is on the balance sheet.

Nobody expect big changes here, so should the FOMC announce an early end to the run-off that could be taken as a consolation prize if the rest of the announcement isn't unambiguously dovish. But we dont expect initiatives here.

We think there is a wide dispersion of expectations around this meeting. I expect and hope that the guidance and the wording will be clear and free of possible misinterpretation. There's no real consensus for today's announcement; whatever happens, inevitably someone will be surprised.

Best regards

Simplify Partners Management Team

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