Upcoming FOMC Rate Decision & Its Impact on the Market

The FOMC (Federal Open Market Committee) holds eight regular scheduled meetings during the year, as well as other meetings if needed. The upcoming 30-31 July meeting has already caused rising confusion in the wake of market-moving speech by one if its top officials. Hence, the communication challenge faced by the US central bank has raised several concerns as the central bank is expected to move toward a historical interest rate cut at the end of July.

Key Speeches by US Fed Reserve Members Influencing Market Expectations about the Upcoming Expected Rate Cut

Jerome Powell – US Federal Reserve Chairman

Fed Chairman Jerome Powell’s testimony at Congress confirmed intentions that the central bank will cut interest rates this month, despite a strong June payrolls report. An overview of recent incoming data and other developments have shown that uncertainties around trade tensions and concerns about global economic growth continue to weigh on US economic outlook (see Figure 1). In addition, inflation pressures remain muted and below the Fed Committee’s 2% target, therefore encouraging the central bank to provide additional accommodation in the near-term to ramp up inflation.

Figure 1: Global Economic Activity from 2011 – 2019

John Williams – President of the US Federal Reserve Bank of New York & Key Monetary Policy Maker

While a 25-basis point rate cut by the Fed was expected by the market early this week due to limited buffer against a weakening global economy and continual trade tensions, comments by John Williams spiked the odds of a 50-basis point cut and caused US Treasuries to rally. William’s statement that ‘protective’ action in low interest rate and low inflation environment needs to be taken. Although the probability of a more aggressive easing went back down to 37% by Friday from 66% on Thursday after Williams later clarified that his comments were not “about the potential policy actions at the upcoming FOMC meeting”, we will be expecting a more dovish stance from the Fed soon (see Figure 2).

However, if the Fed made a fifty-basis point cut then an equity panic will likely occur. But if global economic developments continue to worsen, such as trade talks between US-China are deteriorating or face setbacks, then the Fed cutting more rates to counter this event will be good for the Aussie dollar.

Figure 2: Dovish or Hawkish Sentiment Score over the past few decades