Written by The countdown to the Fed meeting is almost over
The long wait is over as the most critical Fed meeting of 2025 will take place today, with the rate decision set for 18:00 GMT. Markets overwhelmingly expect a 25bps rate cut, with the focus also being on the SEP report and its dot plot, and the usual press conference hosted by Fed Chair Powell at 18:30 GMT.
One could argue that, with inflation remaining elevated and the labour market just starting to show some weakness, a rate cut might not be necessary at this stage. However, following the early August jobs data, Powell’s speech at the Jackson Hole Symposium left little doubt about the Fed’s intention to restart its easing cycle, a view cemented by the early September data prints.
Had the discussion focused only on the economic outlook and the Fed’s dual mandate, today’s meeting might have been straightforward. However, with US President Trump in office, nothing is straightforward these days. The attempted power grab, Miran’s appointment and Trump’s attempt to remove Lisa Cook from the Fed could result in a toxic atmosphere at today’s meeting, with FOMC members potentially being unable to freely express their opinions, even though participants are bound by strict confidentiality rules.
Market reaction could vary greatly
The baseline scenario for today’s meeting is: (1) a 25bps rate cut, (2) a semi-dovish press conference by Powell keeping the door open to further easing, (3) a strong majority in favour of the 25bps cut, with up to three dissidents voting for a 50bps cut, and (4) a downward revision to growth projections. As markets have largely priced in this scenario, confirmation could result in a relatively limited reaction.
That said, even if the Fed delivers the 25bps cut and meets the above expectations, other factors could influence market movements. A dot plot showing two rate cuts for the remainder of 2025 and a similar strategy for 2026, and/or a dovish tone by Powell could weaken the dollar and boost risk assets.
With the chances of no rate cut close to zero, the biggest risk is that the 25bps rate move is accompanied by a more hawkish-than-expected press conference. If Powell avoids sending a clear signal about an October rate cut, dampening expectations for back-to-back cuts, equities could suffer, with the dollar attracting a decent bid.
Meanwhile, a 50bps rate cut appears to be unlikely today. Such a move would suggest that the FOMC is extremely worried about the economic outlook, and it may be seen as the product of political pressure from Trump. In this scenario, gold stands to benefit, with both the dollar and US equities potentially taking a considerable hit.
BoC to set the tone for the Fed meeting
Ahead of the pivotal Fed meeting, the BoC will hold its sixth meeting in 2025. Data has taken a turn for the worse lately, with the labour market easing and the economy losing steam in the second quarter of 2025. Despite the mixed inflation signals, markets expect the second 25bps rate cut this year, with a similar move priced in for December.
One could argue that the BoC is forced to follow the Fed’s lead to avoid any sharp appreciation of the Canadian dollar, but the truth is that both the US tariffs and Trump’s intention to revisit the USMCA agreement – most likely amending it in favour of the US – increase the incentive for the BoC to act today.
The loonie has managed to avoid a significant selloff against the US dollar, but this could change today if the BoC appears more dovish than the Fed, which is not completely illogical considering the overall economic outlook.
By XM.com
