Watch Tutorial: What to Watch for in the Most Important Federal Reserve Decision in Recent Years on Thursday Morning?

This week, the Federal Reserve is about to achieve its first interest rate cut in 4 years, and global investors are holding their breath.

The market generally expects the Fed's rate cut to be at least 25 basis points, with J.P. Morgan and some economists predicting that the rate cut could reach 50 basis points.

This rate cut marks the beginning of the end of the Fed's years of high interest rate policy, opening the door for the repricing of trillions of dollars of assets globally.

What to watch for in the Fed's most important meeting in recent years?

In addition to the rate cut magnitude, the dot plot for this year's rate cut forecast is particularly important. If more members support a larger rate cut, the market may adjust asset pricing accordingly. Additionally, how Powell "explains" the magnitude of the rate cut at the press conference will also impact financial market volatility.

"Decisive Moment" is Coming!

This is a "decisive moment" that will free the world's largest economy from a long period of rising borrowing costs.

"This is a huge positive for Americans and the entire global economy," said Mark Zandi, Chief Economist at Moody's Analytics. "It will largely relieve the Fed's pressure on the economy and allow it to move forward. It has helped, stock prices are higher than they would be without this situation."

However, policymakers and the future path of the U.S. economy remain uncertain. While the rate cut may bring about accommodative policies, many investors and some economists are concerned that the Fed has waited too long, putting the labor market and economic growth on thin ice and injecting volatility into the financial markets. Last Friday, the U.S. Treasury market experienced sharp fluctuations, reflecting increased market expectations for a 50 basis point rate cut.

In addition to economic fundamentals, the Fed also faces pressure from the political arena. With the November U.S. election approaching, Republican candidate and former President Donald Trump warned that the Fed should not cut rates on the eve of the election; while Democratic Senator Elizabeth Warren pressured officials to lower rates by 75 basis points.

Priya Misra, Portfolio Manager at J.P. Morgan Asset Management, believes that a 50 basis point rate cut is "the right thing to do."

However, she noted that due to concerns about inflation persisting, a 25 basis point rate cut seems slightly more likely. She added that if the Fed does indeed cut rates by 25 basis points, market reaction will largely depend on how officials "interpret" the smaller rate cut.

That's why after the Fed's rate cut at 2:00 am on Thursday, investors and analysts will focus on two things: the Fed's forecast for the benchmark interest rate path, known as the "dot plot," and half an hour later, the press conference to be held by Fed Chair Powell.

The Dot Plot for This Year's Rate Cut Forecast is Particularly Important

First and foremost, the dot plot for this meeting will be crucial. Because it reveals the Fed policymakers' expectations for interest rate trends through 2027.

This meeting marks the Fed's potential entry into a rate cut cycle, and the dot plot will reflect policymakers' views on the number and magnitude of future rate cuts. David Wilcox, who previously led the Fed's Research and Statistics division and is currently the Director of U.S. Economic Research at Bloomberg Economics, stated:

"The dot plot at the end of the year has now become particularly important, as it is clearly receiving more attention, because the Fed is on the edge of starting a rate-cutting cycle."

Specifically, the dot plot will show the internal divisions within the FOMC, such as how many members support further rate cuts in November and December, especially if a large number of members lean towards a further significant 50 basis point cut before the end of the year, which would signal that the Fed may take more aggressive action in the future.

Regardless of the numbers, it will show a significant change from the June forecast, when no decision-maker expected more than two rate cuts this year.

The release of the dot plot will directly impact the market's pricing of interest rates. Since the disappointing July employment report released in early August, traders have been betting on a full 100 basis point rate cut by the end of this year. As of last Friday, traders expected a cut of about 114 basis points by the end of December. By the end of 2025, they expect the benchmark rate to fall to 3%.

If the dot plot shows more members supporting a larger rate cut, the market may adjust asset pricing accordingly, pushing market expectations further downward.

Powell's Press Conference Focuses on Rate Decision Interpretation

Fed Chair Powell will speak at a press conference after the rate decision meeting. His remarks often provide more background and details, especially regarding the considerations behind the policy.

If he hints at further rate cuts in his speech, or expresses concerns about economic risks, the market may adjust investment strategies accordingly. In addition, how Powell "explains" the magnitude of the rate cut (such as 25 basis points or 50 basis points) will also affect financial market volatility.

Wilcox, who has advised three Fed chairs, said that Powell himself may also want to leave room for future meetings, regardless of how much they cut rates from the start.

"Whether the Fed announces a 25 basis point rate cut or a 50 basis point rate cut, the final decision is very close," Wilcox said. "In a sense, this decision can be seen as a 'divided decision'." He suggested that there may be differing opinions within the Fed, without absolute consensus.

Challenges of Achieving a "Soft Landing"

Facing a weakening US labor market, Fed Chair Powell stated that if the unemployment rate continues to rise, the Fed will take rate-cutting actions to address it.

However, historical experience shows that achieving a so-called "soft landing" is very difficult. The Fed successfully avoided an economic recession only in the mid-1990s, and in most cases, cutting rates too late will trigger an economic downturn.

Currently, the US unemployment rate has risen from 3.4% in April last year to 4.2%, indicating a slowdown in the job market. Meanwhile, rising mortgage rates and soaring house prices have led to real estate activity dropping to the lowest level in nearly 30 years.

Michael Kelly, Global Head of Multi-Asset at PineBridge Investments, has not predicted that the US economy will fall into a recession, but he is concerned enough that he is buying long-term US government bonds as a hedge against this outcome "We have seen before that once the job market collapses, it will collapse rapidly," Kelly said. "Once the stones start rolling down the hill, it's hard to stand in front of them and stop them."

BI strategists Ira F. Jersey and Will Hoffman stated:

Any action by the Fed at the meeting other than a 25 basis point rate cut would surprise the market, but the rate market may glean clues from changes in the dot plot.

If the Fed's rate outlook changes, the short-term rate market may quickly adjust after the initial reaction. However, the most likely scenario is still: Powell emphasizing post-meeting press conference that they will continue to "rely on data."

There are internal divisions within the Fed on how to balance the risks of inflation and the job market, with some officials like Atlanta Fed President Raphael Bostic and Michelle Bowman concerned about inflation rebounding, while others like Christopher Waller and Austan Goolsbee are more focused on the deterioration of the job market.

This means that anything on Thursday—from the committee statement to forecasts, to every word Powell says—will be closely watched. Investors will seek reassurance that officials are still on a rate-cutting path to prevent a labor market collapse while also addressing inflation. Morgan Stanley's Chief Global Economist Seth Carpenter said:

"This will require the Fed to strike a balance between the two aspects of its dual mandate more than ever before, and for the market, they will scrutinize these matters rigorously."