NEW YORK, Sept 18 (Askume) – Traders in global financial markets are facing huge uncertainty as they await an expected interest rate cut by the Federal Reserve on Wednesday , triggering market volatility.
Major brokerage firms expect the Federal Reserve to cut interest rates by 25 basis points at the end of the two-day monetary policy meeting, while financial markets see a good opportunity for policymakers to start an easing cycle with a 50 basis point interest rate cut.
Federal funds futures, which reflect market expectations for the future of monetary policy, have raised the probability of a 50 basis point rate cut to 61% from 30% a week ago. The outlook fell sharply after media reports revived the possibility of more aggressive easing.
According to a BofA Global Research report, these last-minute moves have led to a lack of clarity in federal funds futures regarding the FOMC decision.
“It’s very rare for the market to be split on Fed action less than 24 hours before the event,” said George Boeri, chief investment strategist at Allspring Fixed Income.
“Typically, the Fed either communicates very specific actions or leads the market to form expectations,” Sachs added. He added that since the decision is highly uncertain, the situation is unlikely to worsen.
Although the Fed’s decisions often influence the market, traders’ expectations for 25 basis points and 50 basis points are relatively similar, so that any decision made by the Fed may surprise many traders.
Deutsche Bank analysed how the Fed’s move could be the biggest surprise in 15 years, compared to market pricing two days before the decision.
“Nobody knows for sure … people are making different guesses, they’re guesses if you want to call them that, and about half of them are going to be wrong,” said Matt Weller, director of market research at StoneX.
“So they’re going to have to adjust their positions … either way, we’re probably going to see a lot of volatility in the market,” Weiler said.
Effect
Investors said asset classes such as stocks, currencies and fixed income are likely to see volatility in the immediate aftermath of the decision.
Stock options on the S&P 500 index (.SPX) were trading volatile, up around 1.1% on Wednesday , according to data from options analysis service ORATS.
The recent rebound in U.S. stocks — the S&P 500 has risen 4.2% in seven consecutive trading days — makes it easy to be disappointed if the stock market falls. The S&P 500 rose 0.03% on Tuesday, closing at its record high set in July.
“With U.S. stocks near all-time highs and the Fed signaling a rate cutting cycle, the risk-return balance looks poor for further gains,” said Tara Hariharan, managing director at global macro hedge fund NWI Management.
Traders who currently expect rates to be cut by about 120 basis points by the end of the year may also have to reconsider their thinking if the Fed’s decision and Chairman Powell’s comments shake their confidence in a substantial rate cut.
“Given the continued resilience of the U.S. economy, the market will need to price in some moderation,” he said, adding that he expects the next part of the yield curve to be steeper.
The Fed’s decision could also cause turmoil in foreign exchange markets, as the USD/JPY pair is considered the most sensitive to interest rate decisions. The dollar rose nearly 1% against the yen to 141.95 on Tuesday.
StoneX’s Weller said a 25 basis point cut could lead to a surprise rise in the dollar, potentially taking USD/JPY above the key 142.00 level, while a 50 basis point cut could lead to a surprise rise in the dollar, potentially pushing it above the crucial psychological threshold of 140.
Glenn Cappello, managing director of fixed income at Mishler Financial Group, worries that interest rate volatility will intensify due to the excessive expansion of the market after the Fed’s decision.
A 25 basis point rate cut would likely trigger a sell-off in US Treasuries, although a lot would depend on the Fed’s press conference, Capello said.
Michael Rosen, managing partner and chief investment officer of Angels Investments, believes the bond market is too bullish for the pace of monetary policy.
“The market is pricing in a 250 basis point rate cut next year, which would only be reasonable in a recession. While a recession is possible in the next 12 months, it is unlikely and likely to be short-lived,” Rosen said. Yields were higher than market expectations.
