Ahead of the Fed
A few thoughts on tomorrow's meeting, the markets, and potential trade ideas for the next 3-6 months
There’s little doubt that the Fed will cut by 25bps tomorrow, but questions continue to remain on a jumbo cut and the tone that will be set for future cuts. Tomorrow’s meeting also comes with the Summary of Economic Projections, but we don’t think there will be a change to the number of cuts for 2025. We do think there may be adjustments to the unemployment rate.
The bar for a 50-bp cut is much higher because:
Inflation continues to remain sticky
Financial conditions have already eased on the Fed’s dovishness. Too dovish and the markets will start to question the Fed’s independence. We’re already on that path.
The impact of the labor market revisions has already played out to a large extent in the GDP growth numbers. Yes, there’s always a lag, but so far, GDP growth, while slowing, still remains relatively resilient.
The Fed did a jumbo cut last year, and that proved to be somewhat of a mistake.
Now, all of this is conjecture, and none of us knows for sure what is coming. The Fed has surprised us in the past and can very well do so again.
But aside from a jumbo cut, what else could be in the works? We also want to address what the impact could be for markets from here on out, and possible trades to look at.
September 2025 FOMC Expectations
We expect the presser to be in line with Powell’s Jackson Hole comments - highlighting the weakness in the labor market and talking about upside risks to inflation.
Tomorrow’s rate decision also comes with the Summary of Economic Projections.
Last time, we saw a significant reduction in GDP growth for 2025, with an increase in inflation projections.
This time, we expect some adjustment to the Unemployment number, but we don’t expect any changes in the Fed Funds rate projections. The current projection stands at 3.9% for 2025, equating to two rate cuts, and we don’t expect more than that for the year.