The policy decision everyone is waiting for will be announced at 2:00 p.m. ET today. Fed Chair Powell will follow with a press conference at 2:30 p.m. ET.

According to the CME FedWatch Tool, a rate cut of some kind is a given. 

There is a 100% probability of a rate cut priced in, which includes a 21.9% probability of a 50-basis points cut.

There would likely be a catastrophic sell-off if the FOMC did nothing. 

Though there is a fair argument to be made that the FOMC should do nothing considering the unemployment rate at a 50-year low, the S&P 500 and Nasdaq Composite at record highs, and real GDP averaging 2.6% for the first half of the year, but the Fed doesn't like to surprise the market by doing the exact opposite of what the market expects.

The view is that the FOMC will announce a 25 basis-points rate cut and emphasize the deficiency in meeting its inflation target as the basis for that decision. It would be a shock, however, if the decision was unanimous.

The market will listen intently for why the FOMC voted to lower the target range for the fed funds rate from 2.25-2.50% and how it is going to assess if/when another rate cut is needed. (Data dependence used to be the ticket here)

The fed funds futures market is priced for two rate cuts before the end of the year and third cut is a coin flip. Potentially, a sell-the-news event could take shape if the Fed creates a sense that it is one-and-done for some time with a 25-basis points cut as that would not meet the standards that Wall Street is currently expecting. Cutting by 50 basis points at the July meeting would likely be satisfactory for the market.

It will all come down to trying to figuring out what the Fed will do. Essentially it’s a guessing game. An unnecessary coin flip. The annoyance is that a cut is “generally” supportive of risk on assets until an inflection point comes along creating troubling tension. The juxtaposition however is that low rates are pushing asset prices into inflation extremes and causing complacency on wall street (buybacks and special dividends vs business growth). In the absence of meaningful economic growth to justify multiple expansion this sets up the markets for little to no slack.


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