The Fed Open Market Committee will meet again next week to decide on whether to keep interest rates where they are or whether to make another cut. The meeting will kick off on Tuesday the 29th and will end with the rate decision on the 30th.
The Fed probability calculator from the Chicago Mercantile Exchange shows a 93.5% chance of another 25-basis point cut. That probability was at 84.4% last week and 64.1% one month ago. A number of factors have caused the big jump in the probability of a cut, with some of them being actions by other central banks around the world.
The European Central Bank met on October 24 and at the end of the meeting, the last one with Mario Draghi as President of the ECB, there were no changes to the rates. The ECB also made statements that it sees keeping the rates where they are or moving them even lower for the foreseeable future and that it would start its bond repurchase program in November with a goal of buying 20 billion Euros worth of bonds each month.
On the same day as the ECB meeting, the Central Bank of the Republic of Turkey cut rates for one-week repo rate from 16.5% to 14% as the threat of sanctions was reduced with the agreement reached on October 23 between Turkey, Syria, and the U.S. The National Bank of Ukraine cut its benchmark rate from 16.5% to 15.5% on the same day.
The Bank of Japan is scheduled to meet next week with a two-day meeting on October 30 and 31. There seems to be some disagreement among board members on what path needs to be taken. Governor Haruhiko Kuroda has hinted at the possibility of easing due to the global economic uncertainty. Other members are concerned that making a cut now would be using ammunition that should be saved in case conditions get worse.
Getting back to the Fed and the meeting next week, Goldman Sachs issued a statement regarding the meeting and a couple of actions they think the Fed will take. Goldman agrees that the Fed will make the cut that is expected, but their economists think the Fed will make changes to the language in the statement that accompanies the rate decision. Goldman’s economists expect the Fed to indicate that this is the last cut for a while and will end the “midcycle adjustments” Chairman Powell referenced in July.
In addition to that policy change, Goldman expects the Fed to remove a key part of the statement, the part that states “will act as appropriate to sustain the expansion”.
In a note to clients, Goldman economist Spencer Hill stated, “We expect the ‘act as appropriate’ sentence to be replaced with a reference to the easing actions already delivered (mirroring the language in October 2007 and June 2008) coupled with the following less committal guidance: ‘will act as needed to promote its objectives.’”
One thing that has kept the Fed on its toes has been the trade war between the U.S. and China. With the two countries seeming to reach a baseline agreement last week, this could relieve some of the uncertainty from that angle. However, durable orders fell 1.1% in September and that is the latest economic report to show that manufacturing concerns are ongoing.
The ISM manufacturing index for September showed contraction from this sector of the economy and that was a warning sign for investors and economists. The October ISM report isn’t due out until November 1, two days after the Fed meeting and the same day as the October employment report.
What is really interesting is that the advanced look at third quarter GDP results is due out on October 30, the morning of the day the Fed meeting is set to end with a rate decision.
Needless to say, next week will be huge for economic events and reports—Fed meeting, GDP report, employment report, and ISM manufacturing index. The question is, will the statistics change the path of the Fed and what Goldman expects, or will Chairman Powell maintain the course?