(BFM Bourse) – The American central bank will announce its monetary policy decision, i.e. its rate cut, at 8 p.m. The market is hesitating in its projections between a reduction of 25 basis points and 50 basis points. Bank of America explains that this is the most uncertain meeting since at least 2015.
It’s the big event of the week for the market: the outcome of the two-day meeting of the American Federal Reserve (Fed). The American central bank will give its verdict on rates at 8 p.m. and its chairman, Jerome Powell, will speak immediately afterwards.
In light of recent economic data, which have shown a worrying slowdown in the American economy, the market has already priced in a reduction in key rates. Jerome Powell himself had telegraphed this move during his speech in Jackson Hole at the end of August. The central banker had judged that the “time had come” for a “monetary policy adjustment”. A message received five out of five by investors.
The real question the market is asking is whether the Fed will opt for a 25 basis point (0.25 percentage point) or 50 basis point (0.50 percentage point) rate cut.
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Pessimists and realists
Investors are hesitant, and not just a little. According to data from CME Group’s Fedwatch tool, they give a 63% probability of a 50 basis point cut and 37% of a 25 basis point cut. This is in complete contrast to economists’ forecasts. According to a study by Wolters Kluwer, 86% of them expect a 25 basis point cut, and 14% expect a 50 basis point cut.
“On the one hand, there are the pessimists who see the American economy on the brink of recession and are arguing in favour of a 50 basis point cut. On the other hand, there are the realists, of which we are one, who consider that the American economy is doing well,” summarises Christopher Dembik, investment strategy advisor at Pictet AM.
Rarely has a meeting seemed so indecisive. Most of the time, the market and economists have a good idea of the Fed’s decision and surprises are very rare.
In a note published Monday, Bank of America stressed that this September 2024 meeting is “the most uncertain since at least 2015.” The American bank based its assessment on market data dating back to January 2015.
It is even likely that this meeting will be the most indecisive since the great financial crisis of 2008-2009. Simply because, starting in December 2008, the Federal Reserve had brought its rates down to zero and then kept them at that level for seven years to support an economy that was struggling to recover from the crisis. The suspense over rates during these seven years had therefore been limited, if not zero.
A disappointment to be expected
“Market uncertainty over the Fed’s decision is the highest in more than 15 years,” Xavier Chapard, strategist at LBPAM, said this Wednesday morning.
As a corollary to this significant uncertainty, the market has a good chance of being surprised, in one direction or another.
“The market is anticipating a 40 basis point (0.4 percentage point) rate cut, which is a probability of only slightly above 50% of a 50 basis point cut, rather than 25 basis points. So the surprise will be more than 10 basis points, down or up, on short-term rates in the coming days. The Fed had guided market expectations better even when it raised its rates by 75 basis points four times in a row in 2022,” Xavier Chapard dissects.
The Fed and Jerome Powell will therefore be walking on eggshells tonight. “Poor communication could increase risk aversion on the markets, despite a larger rate cut than expected,” warns Xavier Chapard.
Barclays, for its part, believes that the market will have to bite its lip and absorb a disappointment. “We believe this is one of the rare meetings where the Fed’s policy will not validate (market expectations); we still expect a 25 basis point cut,” the British bank warns.
Julien Marion – ©2024 BFM Bourse
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