Fed Day Primer, September 18, 2024, the big one

Probability of rates cuts

0-Day Fed Funds futures are showing a 61% chance of a 50bp rate cut tonight, with 39% expecting a 25bp cut, and no one expecting the Fed to hold steady.

Interestingly, the odds of a 25bp cut have been rising quickly in recent hours.

So, will the Fed go for a 50bp cut? Or could we see a 25bp cut paired with a more hawkish message to signify a more gradual loosening? If it’s only 25bp, we could see bullish trades unwind as risk markets adjust to less favourable liquidity conditions, with a sell-off.

Or perhaps Powell will engineer a cut that lets him take a victory lap (again) and leave it to other Fed officials to handle the market’s reaction with some hawkish comments later.

QT is way more important than rate cuts

That said, focusing on rate cuts misses the main game—quantitative tightening (QT) and the Fed’s balance sheet reduction.

QT is the real bazooka of monetary tightening, just as QE was the weapon of choice for loosening.

What we should be watching for is whether Powell will pair any rate cut with a slowdown in QT—leaving more liquidity in the system—or, less likely, signal an end to QT altogether. That’s definitely not priced into markets and therefore has the greater potential to move markets, if announced.

What now?

We’ll soon see how Powell balances guidance, rate pause/cuts, and QT/QE in what will be his last chance to make a defining move/policy reversal implementation, before the November 5 elections—unless something drastic forces an earlier adjustment.

In reality, doing nothing might be the smartest play, but according to Fed Funds Futures traders, that outcome has a 0% chance of happening—perhaps because the market feels the Fed would be worried about another SVB moment happening if rates were to stay too high for too long.

See you in the market.

Mike

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