The Federal Reserve's decision is upon us. Lower rates, and what's next?
Today, we have the Fed's decision on interest rates. They will be cut, that's practically certain. Beyond that, there are more unknowns. What about the balance sheet reduction program? Who will be the next chairman? How much further will Jerome Powell lower rates?
Following the release of the September inflation report last Friday, the carpet for an October rate cut has been widely rolled out. Such a move was already anticipated, and now markets are pricing in a series of cuts, including a move in December and a drop in interest rates below 3% next year. Furthermore, the end of the central bank's balance sheet reduction program is expected. Initially, such a decision was expected in December, but now the consensus has largely shifted to today's meeting. Although the Fed's balance sheet remains large, relative to CBA returned to the average level of the previous decade and central bank representatives signaled that this time they did not intend to go as deep with the reduction as in 2018.
So are there any threats?
Perhaps most importantly, market optimism. When markets have already priced in the most optimistic scenario, it's difficult to positively surprise them. Especially since optimism is blowing from all sides. The AI bull market is in full swing, and it's starting to take on signs of a speculative bubble. In addition, President Trump, who is in Asia, is heating up the atmosphere by announcing groundbreaking trade agreements.The meeting with President Xi is scheduled to take place tomorrow in Korea, although there are concerns that the agreement might be a bit of a show-off and in practice a tactical ceasefire – serving Xi's interests (China, catching up with the US, needs as few restrictions as possible) and providing Trump with fuel for Wall Street and an avoidance of economic complications before next year's congressional elections.
The fact is that the American economy (and the global economy more broadly) has weathered the period of increased tariffs quite steadily, and fears of a wave of inflation have proven exaggerated. Nevertheless, even if we look at yesterday's Conference Board index, we get another subtle signal that the situation on the labor market is deteriorating while inflation expectations are risingOf course, as long as this doesn't translate into corporate earnings or as long as it doesn't stop the Fed's dovish narrative, such signals don't resonate with investors, but it's a potential threat that should be considered.
Stable dollar exchange rate
The impact of the Fed meeting will also be important for gold market, where the first half of the month saw a nuclear bull market, while recent days have seen a noticeable correction. It's worth noting that despite dovish expectations, the dollar exchange rate is stable. The dollar is losing ground against currencies from the other countries, but this is more likely a result of the correlation between these currencies and Wall Street and expectations of the success of the talks in Asia, while European currency rates are stable. Therefore, it cannot be ruled out that potential profit-taking following the decision could even strengthen the dollar despite the rate cut.
Investors should remember that the day doesn't end with the Fed decision (19:00 p.m.) and the president's press conference (19:30 p.m.). After the close of trading on Wall Street, we have the earnings release. Microsoft, Alphabet and Finish Lines.
At 8:00 a.m. the euro costs 4,23 zloty, the dollar 3,64 zloty, the pound 4,81 zloty and the franc 4,58 zloty.
Source: Dr. Przemysław Kwiecień CFA, XTB