FOMC Meeting, 16-17 September Preview: Is this the moment the market turns or dovish narrative stokes further upside?

Zeitgeist: We’re going to find out how far apart the market is on what it wants versus what the Fed can deliver.

The Federal Reserve is expected to cut rates by 25bps on Wednesday as it seeks to resume the journey to neutral to support a deteriorating labour market, despite warming inflation pressures.

Under huge pressure from the Trump administration, the market believes that softer economic data and specifically weak jobs numbers mean a cut is a done deal, with two more expected this year. While inflation has picked up due to tariffs, economic activity and employment is slowing – risks have skewed to the downside. Thursday’s unemployment claims rose to the highest in nearly 4 years – the situation looks rather fragile.

The question is whether the market is too complacent about the Fed’s dovish pivot. True, the labour market has worsened sharply, as seen by the recent nonfarm payrolls reports. But it should be noted that the June summary of economic projections showed policymakers expected an easing in employment conditions. And I reiterate that falling labour supply means payrolls don’t need to be created as quickly as before for the Fed to fulfil its mandate.

Moreover, inflation has picked up some more, with the August CPI print rising to 2.9% from 2.7%, moving further away from the Fed’s target. And faced with unrelenting assaults on his person by Trump, chair Powell may just be inclined to stand pat.

All that said, it seems this meeting is the pivotal moment of the year, when the employment side of the Fed’s dual mandates takes priority over the inflation side. Yes payrolls don’t need to run so hot as before, but the unemployment rate has risen to 4.3%, which is the highest since October 2021 – cooling that Powell noted in his Jackson Hole speech was “unmistakable”.

Assuming the Fed does cut, markets will pay close attention to the updated statement, SEP and press conference with Powell to see whether this is the first of several cuts (three cuts of 25bps are priced), or if the guidance is more guarded around inflation risks. It’s likely that the statement will reassert that the “extent and timing” of further policy adjustments will be dependent on incoming data.

Also of importance is the vote split – we should be in for a few dissenting votes on either side of the fall line, with up to three pushing for a 50bps cut and some of the more hawkish regional presidents arguing for no change.

The other question – as I detailed here – is what kind of cut(s) the market is getting.

The dot plot is almost meaningless. In June it showed seven policymakers expected no rate cuts in 2025. Now it’s likely the Fed delivers at least two before the year is over. The SEP will show a stagflationary vibe.

In the press conference, chair Powell will likely stress the Fed’s desire to do everything it can to support the labour market, whilst leaning on upside risks to inflation that will mean the path of policy is not on a preset course.

Just leave you with one thought – does this meeting and press conference etc leave the risk-on, easing narrative intact enough? If the Fed can cut now with being seen as compromising its independence (which I think it can), then this could be good for risk. But the key is going to be the inflation data over the next quarter.