The threshold for a rate cut at subsequent FOMC meetings may not be as high as you would think
As things stand, Fed funds futures are pricing in a ~22% probability of the Fed cutting rates again before the end of the year.
Given the fact that the Fed had more or less given an indication of a pause less than 12 hours ago, I would those odds are pretty high up. Let's dial back to the Fed messaging yesterday to try and work out why this is the case.
No more rate hikes but possibly more rate cuts
That's arguably the biggest takeaway from Powell yesterday as he continues to allude to persistently weaker inflation pressures as a key issue that needs to be addressed before the Fed even considers tightening monetary policy again.
Meanwhile, he argued that it would take a "material" shift in the outlook before the Fed proceeds to cut again. That surely is a signal that they will be looking to keep monetary policy steady in the next meeting(s) but can we be sure?
What does "material" mean?
Without giving a clear indication of what that means, I reckon this is where the Fed may just be setting itself up to get bullied by markets again.
The fact that "material" can mean many different things is what may just keep markets cautious as we could just be one hiccup away from the next FOMC meeting being "live".
Where do we go from here?
Let's venture back to after the September decision:
"I think the main detail here is that the Fed hasn't given markets a firm indication of what it is focusing on in the latest round of cuts. "Insurance" is a very broad scope and one day it is inflation, then it could be trade, then it could be domestic worries, and then it could be a worsening global outlook.
If anything else, it looks like Powell & co. are hoping that markets will find comfort in the data and global developments to price out expectations of a rate cut. But if markets don't do that, then the Fed isn't willing to fight back and instead get bullied into further cuts as we saw in July and yesterday as well.
It could be the same case next month too but we'll see what happens between now and 31 October. Markets will eventually latch on to something to skew odds towards one side or another and we will then see if the Fed has the guts to fight back if they see fit."
All you have to do is replace "insurance" with "material" and you get exactly the same kind of thinking going into subsequent FOMC meetings.
The question now will be, if markets see reason(s) to price in a rate cut for December or January, will the Fed fight back against that?
Since 2015, the Fed has had an awful track record of doing so. As such, the threshold for another rate cut may not be as high as you would think.
