The Fed is expected to cut rates; Powell’s hints on future policy could shake markets

Markets are confident of a 25 basis point rate cut on Thursday, which is expected to address a slowing economy and reduce inflation pressures after two years of aggressive rate hikes. Powell’s news conference will likely reflect a cautious stance, avoiding election-related judgments while emphasizing a measured approach to future fiscal policy.

Evercore ISI’s Krishna Guha expects Powell to maintain a neutral tone, aiming to “be a source of stability and calm” as the Fed evaluates the impact of new policies, including tax and tariff cuts.

Market prices forecast December decline and January pause

Current forecasts call for another contraction in December, followed by a potential pause in January. But Trump’s policy priorities – tax cuts, spending increases and tariffs – could reignite inflation, complicating the Fed’s plan. Trump’s past calls for low rates could also weigh on fiscal expectations, with inflation pressures and consumer debt remaining key concerns.

Future betting dynamics and terminal betting speculation

Attention turns to the Fed’s “end rate,” the potential end point for rate cuts. If Powell signals a lower-than-expected interest rate, it would signal a willingness to ease policy further. Alternatively, a conservative position could involve smaller cuts. LPL Financial’s Quincy Crosby suggests Powell will likely avoid declaring victory over inflation by remaining flexible in the face of uncertain inflation risks.

Fed Balance Sheet Reduction Strategy

The Fed’s balance sheet shrinkage, cutting $2 trillion in Treasury bonds and mortgage-backed securities since June 2022, is expected to continue. However, adjustments could occur if rate conditions are tightened further, prompting greater scrutiny at future meetings.

Market Outlook: Caution due to potential volatility

While rate cuts are expected, any surprises in Powell’s forecasts could cause volatility. Hints of further cuts or an early pause could send stocks higher and yields lower, while cautious statements about inflation or a limited easing cycle could dampen market optimism.