CB Views: September 2024 FOMC Preview

  • Sep 15, 2024

Summary:

  • MUFG Current Fed Views: Although interest rate probabilities have fluctuated between 25bp and 50bp for the first cut, given the slide on pros vs cons, we maintain our view the first cut will be 50bp (we changed our view to a 50bp cut in early August post the weak July NFP and market volatility). Chair Powell can moderate the impact by suggesting that the size and scope of future Fed cuts will be predicated on the evolution of the “totality” of the data and their assessment of the US outlook. As per previous slide, it could be a “hawkish 50bp cut” if the 2024 terminal rate implies only 3 cuts.
  • If the Fed cuts 50bps now, given the next meeting is after the elections, the second cut is equally as challenging to discount. It would make sense to slow to a more moderate pace. We assign a very low risk of a skip due to election vol. We separately list the potential Fed reaction function to full blue or red sweeps. Meanwhile, gridlock outcome is currently embedded in S1 & S2 base case path.
September FOMC Scenarios

Scenario

Probability

Assessment

Dovish Cut (-50bp)

10%
  • Chair Powell has a tendency to sound more dovish at pressers
  • SEP are dovish, if dots have 4 cuts in 2024 and 6 in 2025 (i.e. easing will be front-loaded just as quick as market pricing)
  • Mentions QT will likely end earlier than market expectations
  • Market Implication: Large risk-on + major overall steepening

Hawkish Cut (-50bp)

Base-Case

60%
  • Chair Powell communicates the 50bps is Fed playing catch-up, but also says totality of weak data matters more vs recent CPI
  • SEP split between 3/4 cuts in 2024, no major change to 2025 pace (suggests the Fed could go every other meeting ahead)
  • Market Implication: Spot steepener, mixed risk assets reaction

Dovish Cut (-25bp)

20%
  • Chair Powell communicates was a close call, but only does 25.
  • SEP move up to 3 cuts in 2024 but no major changes to 2025 pace (suggests Fed wants to go every other meeting in 2025)
  • Market Implication: Rates minor up, minor risk asset sell-off

Neutral Cut (-25bp)

10%
  • Chair Powell communicates 25bp and not a close call on 50
  • SEP only show 2 cuts in 2024 and no major change to 2025 pace (suggests the Fed could go every other meeting ahead), long-run dot continues its gradual slide higher towards 2.80
  • Market Implication: Flatten via 10s rally, big risk asset sell-off

 

Please see the link above for the PDF with macro and market charts and scenarios table…