The Federal Reserve is set to execute its third successive interest rate cut on Wednesday. This decision follows a period of significant uncertainty regarding the central bank's direction. Market consensus has converged on a quarter percentage point cut, likely reducing the Fed's benchmark interest rate to a range of 3.5%-3.75%.
However, this move is not without its complications. Members of the rate-setting Federal Open Market Committee are divided. Some advocate for cuts to prevent potential further weakening of the labor market, while others believe that continued easing might exacerbate inflation issues.
This divergence has led to the use of the term "hawkish cut"âmarket jargon for a rate reduction paired with a strong signal that further cuts are not imminent. According to Bill English, the Fed's former Director of Monetary Affairs and currently a Yale professor, "The likeliest outcome is a kind of hawkish cut where they cut, but the statement and the press conference suggest that they may be done cutting for now." English expects the Fed's communication to indicate they are satisfied with current rates and foresee no immediate need for further action assuming economic conditions align with their expectations.
The overall stance of the committee will be communicated through the post-meeting statement and Chair Jerome Powell's news conference. Wall Street analysts predict a statement revision that echoes language from a year ago about "the extent and timing of additional adjustments," with Goldman Sachs anticipating that any further cuts will face a higher threshold.
In addition to the rate decision and statement, investors will pay close attention to updates on the "dot plot"âthe projection of individual officials' rate expectationsâplus forecasts for GDP, unemployment, and inflation. An update on the Fed's asset purchase plans is also expected, potentially marking a shift from the cessation of maturing bond runoff towards renewed purchases.