Feeling like trading this week’s most awaited event?
Tomorrow at 7:00 pm GMT the U.S. Federal Open Market Committee (FOMC) will share its monetary policy decision for the month of September.
What’s the big deal about this month’s decision anyway? Here are a couple of points you need to know:
Everyone’s expecting a rate cut
Back in July, Fed members cut their interest rates by 25 basis points from 2.25% – 2.50% range to 2.00% – 2.25%. It was a BFD since it was the first cut since the 2008 recession, but it was also mostly priced in.
This week, analysts think that the Fed would cut its rates by another 25 basis points to 1.75% – 2.00%.
Wait, why does the economy need stimulus when it’s already the “best in the world” and “poised for big growth?”
As Fed Governor Powell once said, “An ounce of prevention is worth more than a pound of cure.” While employment, consumer, and inflation reports are on fire lately, legit concerns around trade tensions, global economic slowdown, potential geopolitical conflicts, and other central banks bustin’ out stimulus could undo some of these trends.
So, the Fed might want to make another “insurance” rate cut this week. You know, in case these economic drivers slow down enough to tip the economy into recession. No biggie.
Powell needs to get his message rightAs mentioned above, the economy isn’t exactly hurting enough to warrant more aggressive easing from the Fed. On the other hand, Powell also believes that there are “no recent precedents to guide any policy response to the current situation.”
So, how do you say, “the economy is doing well” and at the same time warn that “things could still go really bad?”
Market players think that the Fed head honcho will end talking gradual changes in his presser. That is, he will still highlight Uncle Sam’s economic prospects but also talk about the “significant” risks that are keeping (most of) the FOMC gang on the dovish camp.
Fed’s dot plot chart will reveal all…or nothing
For newbies out there, the Fed’s “dot plot” chart simply marks the officials’ (both voting AND non-voting) expectations for the future path of interest rates.
Back in June, the median scenario pointed to ZERO rate cuts in 2019 and only one rate cut in 2020. Boy, have sentiments changed since then!
We already know from last July’s rate cut that at least two members had dissented from the decision. This week, we’ll know how many members are in favor of even more rate cuts and how low these members think rates should go in the next two years.
Don’t bet all your pips on the dot plot chart, though. If biases can change so drastically between June and July, then it’s unlikely that this week’s chart is a reliable tool for predicting actual policy decisions.
The dollar is in for a volatile session
When an event is as highly anticipated and uncertain as the Fed’s decision pops up, you can bet your neighbor’s cat that we’ll see volatility. After all, traders who have failed to anticipate exactly what would happen only get to price in their new biases after the event.
If the dot plot and economic projections point to even more rate cuts in the next few months, then we could see the dollar fall across the board.
On the other hand, if Powell and his team downplay another rate cut, or suggest that future rate decisions will be more data dependent, then we could see the dollar crush its major counterparts.
That’s it for me today! So, who’s trading the FOMC party this week? If you are, then you better lock in your risk management practices! If you’re not feeling it, that’s fine too. You can stay in the sidelines and note how the dollar reacts for future reference.