Fed Decision Day

The Federal Market Open Market Committee (FOMC) releases their interest rate decision this afternoon and the stakes are high for markets. Investors are anticipating a 25-basis-point cut as predicted by a 95% chance according to the CME FedWatch tool.

The market is at all-time highs with the benchmark S&P 500 (SPX) reflecting optimism of a rate-cut cycle launch. The Fed’s dual mandate between inflation and jobs data has been diverging recently, which has traders divided on their path for interest rates.

Jobs data has taken a hit recently with non-farm payrolls coming in below expectations and a downward revision of 258,000 from the previous two months. The Jobless Claims data came in at 263,000 last week, which was the highest level since October of 2021. This is the data that reflects the Fed may be behind the curve on cuts.

On the other hand, we’ve seen inflation data beginning to show signs of increasing. The recent headline CPI ticked up to 2.9% year-over-year and is going the wrong way from the Fed’s 2% target.

The stock market looks to be optimistic that the Fed is going to start a rate-cut cycle today with three 25-basis-point cuts priced in for the rest of 2025. The Fed is juggling the competing risks of stubborn inflation and a slowing labor market. Traders are betting on two more quarter-point cuts in October and December, taking the target rate to a range of 3.5% to 3.75%.

Stocks will be focused on not only the interest rate decision, but also the rhetoric from Fed Chair Powell’s press conference. Meanwhile, attention will be on the new Summary of economic projections (SEP), including the new dots and what they suggest about the policy path going forward. There will most likely become further bifurcation on the dot plots and projections as the committee has communicated their bias recently. 

Will the Fed cut 25 basis points and communicate a dovish stance based on the weakening jobs market? Or will they cut and remain hawkish based on the inflation data ticking higher? Is a 50-basis-point cut warranted due to the weak employment data?  

There were two dissenters last meeting with Waller and Bowman stating they wanted to cut by 25 bps. Expectations are that they will call for 50 bps this time and potentially continue to divide from the consensus announcement. 

With equities at all-time highs into the announcement, the potential for market volatility is present. Fed Chair Powell has historically remained even-keeled with his commentary to avoid creating market volatility. Could this time be different?

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