The dignified defiant(s) vs the dramatic dissenter(s)?
Scenario |
Probability |
Assessment |
|
Hawkish Message |
25% |
•Statement: The statement has been compressing into a much more minimalistic assessment of the Committee’s views on current factors impacting the economy, jobs and inflation. If the statement remains largely unchanged and the sentence “uncertainty about the economic outlook has diminished but remains elevated" stays broadly the same, it would be hawkish given the recent passage of the O-BBB and trade deals taking form. Waller and Bowman dissent. •Presser: Powell will aim for neutrality and avoid coming across as being outright defiant. However, in an effort to protect the independence of the institution (that has been under constant political pressure of late), he’ll stay on message that recent changes are still creating uncertainty. It’s possible that his tone comes across as more hawkish-leaning compared to market expectations that the chair will start to give in a bit after weeks of pressure. If there is infighting at the FOMC, and this meeting ends with multiple dissents, it could be hard to deliver a consensus view. •Market Implication: Massive bear flattening as rates “rise” taking risk markets “down” with them. |
|
Neutral Message |
50% |
•Statement: A further reduction in the statement length and slight softening on uncertainty risks. Only Waller dissents on notion that Fed should be easing to address cracks forming in jobs market. •Presser: Powell likely wants this meeting to come across as a “non-event” and convey that they are still in a “wait and see” mode. Given that the Fed delayed cuts due to tariff passthrough concerns, they likely want to see how inflation will trend after at least one month of higher tariffs that go into effect in August. Additionally, we note that there are still two more NFPs and CPIs to determine if they are going to signal that a September cut is forthcoming. •Market Implications: The FOMC does not want to be the source of volatility in a world already filled with it, so if they can convey a neutral message but keep September live, threading the needle would still result in a favorable outcome and lead to a minor rates rally while stocks focus on earnings. |
|
Dovish |
25% |
•Statement: A full removal of the uncertainty risks (or at least a nod that it’s lifting), and labor market risks outweigh inflation concerns. No dissents as these changes keep doves at bay. •Presser: Acknowledges rates remain modestly restrictive and that they are now closer to restarting the normalization process so long as jobs data doesn’t accelerate and inflation doesn’t spike. •Market Implication: Fed Sept odds go to 85%, curve steepens, stocks keep making all-time highs. |
Please see the link for the full write-up with charts & scenarios as well as our updated rates forecast at the back of deck…
