Watch out for the risk of a less-dovish Fed

The FOMC statement is due out at the top of the hour and Fed Chairman Jerome Powell will hold a press conference afterwards.

A 25 basis point rate cut to a range of 4.50-4.75% is assured but what comes next isn’t so the market will be looking for hints.

In all likelihood, it will be a continuation of the current statement, which said “recent indicators suggest that economic activity has continued to expand at a solid pace” and that inflation has made further progress.

“In considering additional adjustments to the target range for the
federal funds rate, the Committee will carefully assess incoming data,
the evolving outlook, and the balance of risks,” the statement said.

When that statement was released, Powell fell back on data dependence instead of guidance going forward. Look for that to continue but also look for Powell to acknowledge that economic data has run better than anticipated, though not without positives.

Inflation has been softening in the US and elsewhere and the latest US jobs report was the the worst since the pandemic. That said, the report was very likely influenced by strikes and hurricanes and the unemployment rate stayed low.

The key number for me is 4.4%, which is what the median dot plot is for the SEP, which will be updated in December. Currently, unemployment is 4.1% and November should remain strong due to temporary election hiring and that could possibly continue as election uncertainty fades.

All that adds up to a pause in December or in the following months, likely to a pace of cuts every second meeting and retaining data dependency. That will leave the Fed with plenty of ammunition and a solid Fed put but in the short term the market could be rattled if there is any hint at a pause. That same dynamic would also boost the US dollar.

This article was written by Adam Button at www.forexlive.com.