KEY POINTS:
- The Fed is expected to cut interest rates by 25 bps bringing the FFR to 3.50-3.75%
- The tone is expected to be more “hawkish” with clear signal of a pause and the bar for further cuts being higher
- We will get the Summary of Economic Projections and the Dot Plot at this decision (no major changes expected)
- There will be at least two dissenters against the cut with a maximum of five expected
- The median dot plot projection is expected to remain unchanged with one rate cut for 2026 and another for 2027
- The market is pricing two more rate cuts in 2026 with the first one coming next June with a new Fed Chair
The Fed is widely expected to deliver a “hawkish” 25 bps cut today bringing the FFR to 3.50-3.75%. The reason for the “hawkish cut” expectations are due to large disagreement among Fed members, which is what prompted Fed Chair Powell to admit that a December cut was not a foregone conclusion at the last press conference.
At some point the market was pricing just a 30% chance of a rate cut in December and those expectations weighed on risk assets with the S&P 500 falling back to October lows. Everything changed after Fed’s Williams endorsed a December cut on November 21. The probabilities for a cut jumped to 60% and from there they just kept on increasing giving support to risk assets.
At this meeting, the Fed is likely to go back into neutral stance and confirm that the “insurance easing” process is now over. This would also come with strong data dependency and a message that the bar for further cuts is now much higher. The economic projections are expected to show minimal changes and the dot plot to keep the median projection of one rate cut in 2026 and another in 2027.
STATEMENT
Given the lack of key economic reports like the November NFP and CPI, which were postponed to next week, there shouldn’t be material changes to the first paragraph.
The statement is likely to bring back the “extent and timing of additional adjustments” message to highlight the pause and the higher bar for further cuts.
We should also see more members dissenting for a rate cut this time. The expectations range from a minimum of 2 to a maximum of 5. This won’t be a surprise, although 5 would be slightly more hawkish. Based on the recent speeches and commentary, the likely dissenters should be Schmid, Collins, Musalem and Goolsbee.
Fed’s Barr hasn’t committed to either action and Fed’s Cook hasn’t commented on policy since the October meeting. The former could dissent while the latter should support the rate cut.
Potential surprises:
- No rate cut – very hawkish
- Stronger pause message with something like “risks in achieving employment and inflation goals are roughly in balance” – slightly hawkish
- Five dissenters – slightly hawkish
- One dissenter – slightly dovish
- No dissenters – dovish
SUMMARY OF ECONOMIC PROJECTIONS AND DOT PLOT
The Summary of Economic Projections (SEP) is expected to remain roughly unchanged given the lack of key economic reports and material changes in the economy. At the margin, we could see slight downgrade to inflation projections and upgrade to unemployment rate.
The median projection in the Dot Plot is also expected to remain unchanged with one rate cut in 2026 and another in 2027. Despite the market pricing two rate cuts in 2026, it should tolerate the Fed keeping the dot plot unchanged with one cut in 2026.
Potential surprises:
- Zero rate cuts in 2026 – very hawkish
- Two rate cuts in 2026 – dovish
- Three rate cuts in 2026 – very dovish
FOMC September SEP
PRESS CONFERENCE
Fed Chair Powell will have a hard time striking a balance between not sounding too hawkish or too dovish. He’s likely to say that the process of insurance cuts is now over and that the extent of further easing will hinge on the data.
His goal will likely be keeping things as neutral as possible, and to defer future policy actions to the economic data. Therefore, stressing data dependency should be his playbook.
MARKET PRICING
- December cut: 90% probability
- Total easing by the end of 2026: 73 bps (2 more rate cuts)
- Next fully priced in cut in June 2026
MARKET REACTION
Hawkish surprises:
- Stock market down
- Precious metals down
- Short-term bonds down
- Cryptocurrencies down
- USD up
*If we see an aggressive selloff in the stock market protracting for days, at some point it should start weighing on the dollar as the market will likely price in more or more aggressive rate cuts further down the curve.
Dovish surprises:
- Stock market up
- Precious metals up
- Cryptocurrencies up
- Long term bonds down
- USD down
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