FOMC Preview: Stocks at Risk, Bonds May Rebound as the U.S. Dollar Falls
FOMC Preview: Stocks at Risk, Bonds May Rebound as the U.S. Dollar Falls
By:Ilya Spivak
With the spotlight on officials’ guidance for next year, the markets may be in for a rude awakening
- Another 25-basis-point Fed rate cut is almost certain at this week’s FOMC meeting.
- Markets are interested in what policymakers envision for next year.
- Stocks are at risk, bonds may bounce as the U.S. dollar falls on Fed gradualism.
All eyes are on the Federal Reserve and its Chair Jerome Powell for the U.S. central bank’s last meeting of 2024. The announcement of another interest rate cut seems a foregone conclusion. This puts the spotlight on officials’ guidance for what will come next year. On that score, the markets may be in for a rude awakening.
Fed Funds interest rate futures price in the probability of a 25-basis-point (bps) interest rate cut at this gathering of the policy-steering Federal Open Market Committee (FOMC) at a commanding 95.4%. That means the move has been thoroughly subsumed into asset prices, leaving little to inspire market action.
The markets care most about the FOMC rates forecast for 2025
This step lower completes the forecast that the Fed confidently issued in September, when its quarterly summary of economic projections (SEP) called for 100bps in cuts this year, 50bps of which were delivered upfront. From there, it was hardly a stretch to envision 25bps apiece at the year’s remaining meetings in November and December.
Policymakers penciled in another 100bps for 2025. The markets almost immediately judged that as unlikely because U.S. economic data pointed to strengthening momentum, signaling that rate cuts would reignite inflation and stop the central bank in its tracks.
It kicked off two months of repricing that sent Treasury bond yields and the U.S. dollar sharply higher as traders marked down 2025 rate cut expectations from 130bps on the eve of the Fed’s September meeting to just 48bps today. This boils down to two standard-sized rate cuts, down from five.
Stocks may wobble as bonds rise and the U.S. dollar falls on Fed guidance
For their part, Fed officials have mostly endorsed this rethink. Powell and company have spoken out repeatedly about the central bank’s intention to stay flexible, looking through economic data volatility yet still pivoting as need be. That means the FOMC wants to be careful not to overreact even as it asserts that policy is not on dovish autopilot.
On balance, this implies the committee will scale back dovish intent when it updates the SEP this week but probably not to the same extent as jumpy financial markets. For the Fed to pace traders’ thinking, they’d have to lower their forecast to at most two rate cuts for next year. They might opt for a more modest step down to three.
In this scenario, the markets might find themselves offside having overshot on hawkish repositioning. Rebalancing the books accordingly after the FOMC announcement may push bond prices higher as yields come down and the U.S. dollar weakens against most of its major currency counterparts. Stock markets may wobble too.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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