After months of speculation, we're finally at the point where the Fed may pull the trigger on a significant rate cut. But the big question is: will it be enough? With the possibility of a 50bps cut on the table and growing market anticipation, Chair Powell's decision could set the stage for a bullish rally or trigger concerns of a policy misstep.
How will risk assets, crypto, and small caps react?
Let's dive in!
Disclaimer: This is not financial or investment advice. You are responsible for any capital-related decisions you make, and only you are accountable for the results.
Tomorrow's Fed meeting
Firstly, we had one data point this week before we headed into the Fed Meeting: the Retail Sales data, which came in at 0.1%. The prior was 1.0%, and the forecast was -0.3%.So, the consumer is slowing down but still spending, which supports the "slowdown but not recessionary" argument.
The Fed's reaction to this is basically the same: Let's get these rate cuts going gradually, but it may be wise to get slightly in front of this as there's the chance the Fed is currently behind the curve, hence the calls for the Fed to go 50bps.
The market is now pricing a 67% chance that the Fed will cut 50bps tomorrow, up from just 25% a month ago.
Target Rate Probabilities for the 18th Sept Fed Meeting
Previously, the narrative around a 50bps cut wasn't positive, as it was being interpreted by traders that 50bps might mean the Fed is worried and that the normalisation we're seeing is potentially being seen as weakening in the Fed's eyes.
However, that narrative has now changed. The market recognises that there is a moderation in the data. With Inflation data continuing to come down and a Fed Funds rate at 5.50% remaining unchanged, this is actually net tightening if the rate stays high.
Therefore, with the Fed potentially slightly behind the curve, a 50bps rate cut would likely put the Fed back on the right path. So, we believe that the Fed will do 50bps tomorrow, and the market will likely react positively to it, as it is plain and simple, and it's the right move. The question then becomes, how does the market react to a 25bps rate cut?
Well, we think this would be a policy mistake and represent the Fed's unwillingness to admit a policy mistake back in July when they probably should have cut rates by 25bps. We believe that the market now just wants the Fed to make the right move, which is probably to cut rates by 50bps.
Forward guidance and market expectations
The Fed's forward guidance, the new Dot Plot, and the Summary of Economic Projections are also important.In terms of forward guidance, the market wants clarity from the Fed and Powell at the press conference. This would likely come in the form of an updated Dot Plot showing a gradual easing cycle, with the Fed Funds rate finishing somewhere between 2.5% and 3.5% by the end of 2025.
Powell should emphasise this clarity at the press conference, where he should clearly lay out the Fed's thinking and plans for the next few meetings.
In the Summary of Economic Projections, we expect the Fed to show an increased year-end Unemployment Rate. In the Fed's last SEP, they expected the Unemployment Rate to finish the year at 4.0%, and it's now at 4.2%.
Powell's job will be to calm the market if the Fed releases a new SEP showing that the unemployment rate will increase substantially between now and year-end. This has the potential to scare the market, especially if it is higher than 4.5%.
Cryptonary's take
The market has been waiting a long time for the Fed to begin cutting Interest Rates, and tomorrow, we'll get it.We're also on the side that we believe the Fed will come and meet the market where it is now and cut by 50bps. We also side with the argument that we think risk assets will like a 50bps rate cut rather than be scared that there is something more to it.
We also expect a dovish Powell, which we think can help risk assets extend gains and end up closing a very positive week. This is despite the fact that the S&P is at all-time highs. We believe 50bps and dovish messaging will help Small Caps and crypto the most, so we're expecting strong positive performance over the next 72 hours. We will reassess again then.
Personally, I (Tom) am risk-on going into the meetings, having put the USDT in my trading wallets back to work - mainly into SOL and 'Bluechip' memecoins.
The risk to our thesis for the next few days is that Powell can't get the committee onboard with 50bps, and they end up cutting by just 25bps. We also think the market would see this as a policy mistake, regardless of how dovish their messaging is.
A really exciting 48 hours ahead of us. LET'S GO!!!!!
We're expecting BTC to retest $63,400.
BTC:
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