Fed Verdict Impact on Markets Today
The anticipation surrounding the Federal Reserve’s policy decision today has been a focal point for investors, with the recent US retail sales data providing some insight into market positioning. The August retail sales report showed a slight improvement compared to expectations, with headline sales up 0.1% and core control group sales meeting forecasts at 0.3% month-on-month. While this data may not significantly influence the Fed’s decision-making process, it did prompt some investors to take profits on bets anticipating further easing measures.
The reaction in the market was evident as US yields saw a rebound, with the 2-year yield increasing by 5.4 basis points and the 10-year yield rising by 2.8 basis points. The likelihood of the Fed implementing a 50 basis point rate cut remains at 60%, according to market expectations. This uncertainty in the market led to fluctuations in the Dow and S&P 500, which briefly touched new record levels before retracing. The intraday movements in yields and equities also impacted the dollar, which closed at 100.89 against key support levels.
EUR/USD encountered resistance near the 1.1155 level, closing at 1.1114, while USD/JPY saw a rebound from 140.6 to 142.4. Oil prices continued their attempt to stabilize after a recent sharp decline, with Brent crude at $73.25 per barrel.
Market Expectations and Scenarios
As markets await the Fed’s verdict, there are speculations on the potential outcomes and their implications. Some analysts suggest that a substantial reduction in policy restrictions by 50 basis points could be an initial move by Powell and the Fed to prevent unnecessary weakening of the labor market. The current high policy yield levels provide room for such action, allowing the Fed to reassess inflation and growth while maintaining a rate above neutral by the end of the year or early next year.
In this scenario, a projected cumulative 75 basis points of easing signaled in the median dot plot for the remainder of the year could support market dynamics sensitive to softer-than-expected economic data. While the 2025 projections in the dot plot may be less aggressive than what the markets anticipate, it is unlikely to be a significant driver in the near term. Caution is advised on the dollar’s performance amidst these uncertainties.
Global Economic Developments
The UK’s August CPI data has also come into focus, ahead of the upcoming Bank of England policy decision. The report showed inflation in line with expectations, with headline inflation at 0.3% month-on-month and 2.2% year-on-year. Core inflation rose to 0.5% month-on-month and 3.6% year-on-year, indicating stability in price levels. This data suggests little urgency for the BoE to further ease monetary policy after the recent rate cut in August.
Sterling reacted positively to the data, strengthening against the euro in early trading. The focus now shifts to the BoE’s upcoming decision and any potential policy adjustments in response to economic conditions.
Insights from European Leaders
Andrius Kubilius, former prime minister of Lithuania and the EU’s first-ever defense chief, emphasized the need for increased defense spending within the EU. While acknowledging national authority in this matter, he proposed exploring options such as issuing joint bonds or utilizing funds from the Recovery and Resilience Facility to raise additional capital for defense initiatives. The debate on mutual debt issuance within the EU is gaining momentum, following calls for enhanced competitiveness by Mario Draghi.
The Bank of France maintained its growth forecast for next year at 1.2% but slightly lowered the 2025 prognosis to 1.5%. Governor Villeroy highlighted the need to address long-standing economic challenges, including high debt levels and insufficient growth. Inflation forecasts were revised downwards for next year, reflecting weaker electricity prices and an average inflation rate of 2.5% for the current year.
Overall, the global economic landscape remains dynamic, with central banks and policymakers navigating uncertainties to support growth and stability. The market reaction to upcoming events, such as the Fed’s decision and the BoE’s policy announcement, will provide further insights into the direction of financial markets.
