Fed Meet Preview: By How Much Will Powell Pivot To Boost Growth?

Economists and traders await the US Federal Reserve's interest rate cut decision, to be announced in a matter of hours, as they remain captivated by how much the central bank will pivot. Most analysts are split between anticipations of a 50 or a 25 basis points cut, with more tilting toward the former.

After being hawkish for over 32 months, Chair Jerome Powell's mandate now shifts to engineer a soft landing, as data hints at a slowing economy. The data points for August show that the economy is losing steam.

The recent jobs report showed that non-farm payrolls rose in August by 142,000 last month, against the expected 165,000. The core consumer price index rose 0.3% from July and 3.2% from the previous year, slightly above expectations.

Just ahead of the Fed meeting, US retail sales unexpectedly rose in August, pointing to healthy consumer demand that continues to underpin the economy.

With the labour market losing steam, Fed Governor Christopher Waller said it’s important for the US central bank to begin cutting interest rates this month, but to be “open-minded” about the size of the cut. “The balance of risks has shifted toward the employment side of our dual mandate,” Waller said, adding that policy needs to adjust accordingly.

Fed funds futures traders on Tuesday priced in a 63% probability of a 50 basis-point cut, up from 47% last Friday. They saw a 37% probability of a 25 basis-point cut, according to the CME FedWatch Tool. 

A 25 basis-point rate cut next week remains the base case following the latest US employment and inflation data, said Jefferies' Christopher Wood. The employment data continues to weaken without collapsing, while August inflation data is broadly in line with consensus expectations, he said.

"All this is enough evidence to justify a cut on Sept. 18 for a Federal Reserve, which Greed & Fear continues to believe will prioritise the labour market over inflation," Wood said.

The Federal Open Market Committee meeting on Sept. 17-18 will be the most closely watched event around the world, as it provides cues for other central banks. The US policy decision later in the day will be followed by a press conference by the Chair Jerome Powell.

Markets will also eye the inflows that might potentially enter the emerging markets after the Fed lowers key rates.

The central bank maintained its key interest rate for the eighth consecutive time in July to hold its key interest rate at 5.25–5.5%.

The US Fed hiked its key interest rate from December 2021 to tame inflation and maintained status quo after its meeting on September 2023. Since then, Jerome Powell has remained hawkish and kept its growth priorities on the back seat.

The inflation print in the world's largest economy was on a rise since the latter half of 2019, as it lowered its rate 2.5% to 0.3%, to cushion the economy from the Covid-19 impact. The current rate upper bound range of 5.5% is at the highest since it was 6.5% in December 2000.

A lower-than-anticipated cut in interest rate by the US Federal Reserve will have markets on edge and put Jerome Powell's wording in focus to understand the dovish trajectory, according to Andrew Holland, chief executive officer of Avendus Capital Pvt.

"If the cut this time is 50 bps, the markets have a further leg to grow," he told NDTV Profit. "If it is 25 bps, then Powell's words will be noted on the trajectory for the rest of the year."

Stocks in Asia advanced on Wednesday taking cues from Wall Street as the US Federal Reserve geared up to announce the crucial decision.

Money is set to churn out of US government securities when Powell cuts interest rates as returns decline and flow into emerging and high-yield assets. India, among other emerging economies, is set to absorb higher flows as macro factors remain strong. 

However, the current valuation in which domestic stocks are quoted might not bring the expected flows into India.

Foreign inflows into India during the previous rate cuts have historically been negative in the short term in most instances, Citi said in a note. But India remains better placed compared to its peers in the overall emerging markets this time, Citi said.

According to Citi, global funds have been net negative in the immediate one to three months following the commencement of rate cuts in the US, in three out of four such instances. "The key driver of short-term outflows is usually global risk-off scenarios," the report said.

However, over the longer period of 12 months after the rate cuts were commenced, the flows were positive in all cases as dollar weakness aided. "There has been USD depreciation in the recent past as well," Citi said.