September 18 has been on the calendar for some time as the point at which the FOMC finally pulls the trigger on policy easing, with a first rate cut for four years. This comes after the biggest inflation surge since the 1970s and the worst global health crisis in over 100 years. But for the here and now, it’s all about the size of the first rate cut, what the updated economic projections and dot plot tells us about the easing cycle ahead and any guidance from Jerome Powell.

Money markets have yo-yoed a lot this year with over 150 bps of Fed rate cuts priced in at the start of 2024 to close to less than one months later. Just over 110 bps is currently forecast by Fed Fund futures for this year and with three remaining meetings that means one 50 bps cut and say two 25 bps and 25 bps. For this specific FOMC gathering, it’s 43%/57% between a quarter point or half point reduction. However, consensus still sides with a smaller move.

Data mixed

Last week’s inflation data signalled a marginally faster than expected core CPI print, though some of the components responsible are not included in the Fed’s favoured inflation gauge, core PCE. The 0.3% core monthly reading appeared to tilt the balance in favour a smaller 25 bps rate reduction.

This data came after the second soft labour market report with downward revisions in the headline NFP numbers getting increased airtime, though the figures weren’t as bad as some feared. The second part of the Fed’s mandate – full employment – is key for policymakers. More recently, media reports including from the Fed’s whisperer, Nick Timiraos at the WSJ, also put in play a bigger 50bps move. That said, surprisingly, the last two Fed officials we heard from before the blackout avoided giving any concrete guidance after NFP.

Dot plot and economic projections

Wednesday’s meeting is one of the four, typically in March, June, September and December, in which the FOMC also publish their latest economic forecasts (Summary of Economic Projections or “SEPs”) and each member’s projections on the likely path of interest rates known as the “dot plot”. 

The latter is likely to show three 25 bps rate cuts from just the one previously in the June median plot for 2024 and 125 bps in 2025. That is less than the 100 bps in 2024 and 150 bps next year currently priced in by markets. There will likely be downward revisions to inflation and growth forecasts and an upward adjustment to the jobless rate for this year through to 2026.

Market reaction

On a 25 bps cut, Powell will probably want to tell markets that a series of rate moves are coming, with the door open to larger reductions if the data warrants more policy easing. This dovish forward guidance could mean market moves are relatively steady. Initial buying of USD may tail off as markets realise more policy easing is coming.

A 50 bps rate reduction, plus similar guidance with the emphasis on smaller cuts going forward may be enough to see aggressive dollar selling. Markets could run with more jumbo-sized moves as they fear the Fed knows something they don’t. Anything less dovish in the projections or dot plot could see the greenback rally, though Powell’s press conferences have tended to be relatively dovish this year.