BNY expects the Federal Open Market Committee (FOMC) to cut the Federal Fund Rate by 25 basis points (bps) this Thursday, a move that is 91% priced in.
John Velis, Americas macro strategist at BNY, does not foresee much in the way of forward guidance and expects Powell’s press conference to reaffirm the Fed’s data dependence with respect to future monetary policy.
“The set-up going into the meeting is such that market movements on the Fed’s announcement will likely be dwarfed by post-election market trends,” Velis adds.
While it appears “off-key” to be looking ahead to the Fed meeting, with the US elections just two days beforehand, the calendar has been set and Velis expects more investors to spend the midweek analysing electoral outcomes rather than Powell’s press conference.
Velis believes that it will be a “straightforward” cut with high expectations for a “relatively uncontroversial meeting”, as such he does not expect a significant post-meeting reaction in the markets.
Velis remarks that it is notable how much and how quickly Fed pricing has changed since the previous meeting on Sept 18, repricing from an aggressive and swift cutting path in the days after the 50bps cut to a much shallower path.
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This shows the implied Fed rate cuts leading up to September 2025.
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Exhibit #2 shows the expected probabilities of a 25 bps rate cut at every FOMC meeting leading up to September 2025, with a probability of over 100% implying that one cut is fully priced in and the remainder representing the chance that rates will move by 50 bps.
Following last week’s job market report, Velis saw a gradually weakening labour market that keeps the Fed cutting rates by 25 bps in December.
Velis notes that the 2025 outlook is “murkier”.
The Fed’s most recent Summary of Economic Projections (SEP) sees rates down to 4.5% this year, matching Velis’s expectations.
Velis notes that for 2025, the dots coalesce around 100bp of cuts to which he agrees, adding that he expects four cuts of 25bp at each of the SEP meetings (March, June, September, December) next year.
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Given that economic and political developments are relatively uncertain, his view for 2025 is admittedly not an “especially high conviction forecast”, Velis adds.
Heading into the US elections, Velis remarks that the bond market has seen some interesting movement in recent days.
Velis infers that investors are retreating into cash and cash-like assets at the expense of long-term bonds.
“De-risking going into the election seems to be in play as well as the likelihood of further bear steepening in the event of a Trump win,” Velis notes.
Interestingly, over the past weekend, yields have fallen as electoral expectations have moderated. As such, Velis expects Monday’s data to show a reversal in this pattern of long and short-term flows, given the post-weekend adjustment in prices.
However, Velis is of the opinion that most of the market events will not kick off until at least Wednesday.
