This week is particularly busy for market participants. It opened with the S&P 500 (SPY) gapping up to new, all-time highs on continued marginal progress for a trade deal with China. On Wednesday, the FOMC will conclude its meeting with expectations for the Committee to cut the Federal Funds Rate by 0.25% to 1.75%. On Thursday, there is a largely anticipated ISM Manufacturing report, and on Friday, the October employment report awaits.
97.3% Consensus
As of Tuesday, interest rate futures are pricing in 97.3% odds that the Federal Reserve will cut rates by a quarter point. The Fed's dovishness is somewhat surprising given that unemployment is hovering at record lows, the stock market is at all-time highs, and financial conditions remain quite loose on a relative basis. However the Fed is cutting, because other areas of the economy are showing weakness including manufacturing, agriculture, and export-oriented sectors. Recent data has shown slippage in the service sector, as well.
The real issue is that the Fed makes policy in reaction to the real economy, however interest rates affect the economy with a significant lag. Further, it's one of many variables affecting economic activity. In comparison, monetary policy has an immediate effect on the financial economy. Asset prices immediately adjust to shifts in interest rates.
Looking Ahead
Given the nearly unanimous consensus for a rate cut, the most market-moving part of the report will be Chair Powell's comments at his press conference, and any changes in the dot plot which could give insight into thinking about future meetings. Given previous meetings and marginal improvements in trade, Brexit, and the steepening of the yield curve, Powell should reiterate that the Fed will remain "data-dependent" going forward.
There is widespread disagreement about whether the Fed's rate cuts are a "mid-cycle adjustment" like 1998 or the beginning of a rate cut cycle that will take the Fed to zero percent or even negative rates. Right now according to the CME, there is a 25% chance that rates will be cut for a fourth time at the December meeting.
Some additional factors to watch are the number of dissents to the rate cut and whether the central bank offers more details on its asset-purchase program to settle short-term funding markets. Beyond the meeting, there is a large slate of FOMC members expected to speak publicly over the next week as well.