Markets Expect a Rate Cut: Will the Fed Deliver?

Fed FOMC GDP rate cute interest

When the Federal Open Market Committee wraps up their meeting later today, it will very likely conclude with a 25-basis point rate cut. Although there is always the chance for a surprise, markets are pricing in a 100% chance of an interest rate cut. The only point of contention at the moment is whether the cut will be 25 or 50 basis points.

The CME FedWatch tool shows a 77% chance to a 25-basis point cut and a 23% chance to a 50-basis point rate cut. If the Fed were to again postpone a rate hike, it would likely cause a disturbance to the markets and spark a ferocious selloff.

How markets will react to the expected rate cut, however, is less obvious. With much anticipation and assumed certainty in the decision, markets have priced in much of the announcement already. There may be some level of a rally if the cut ends up being 50 basis points, but any large movement will likely come from the press conference with Chairman Powell.

During the press conference, investors will get to dissect the reasoning behind the Fed’s decision. One of the answers investors seek is an indication of what is next to come. The central question will be whether additional rate cuts are on the horizon for the fall and winter or if this is a one-time cut in reaction to previous hikes.

This FOMC meeting will be a historic one in all likelihood. Although it is extremely uncommon for central banks to cut rates when the economy is not in a recession, it has happened before to prevent recession -most notably in 2008.

After the 2008 rate cut, equities rallied immediately after before being swept up in other issues unrelated to the Fed. After the initial fallout in 2008, rates were repeatedly cut as the economy was in freefall. There is no suggestion here of causation between the rate cut and the financial crisis, but something to consider since 2008 saw the most recent rate cut with similar economic conditions.

Depending on the severity of the action taken today, this FOMC meeting has the potential to set the economy and markets on a completely different trajectory. Traders should be prepared for increased volatility and lower liquidity as the news is announced.

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