What Will the Fed Interest Rate Decision Bring?
The Fed is set to announce the interest rate decision today at 21:00 MetaTrader time. Let’s see how this will impact the trading world.
Analysis of the past activity
The last month was very intense. The eyes of global markets were consistently focused on the US statistical data releases, all in an attempt to catch hints for a long-awaited shift in monetary policy.
The most important event is just around the corner. To prepare, let’s form our own opinions on what might happen using this thoroughly analyzed data:
From the beginning of the year, the core inflation (y/y) dynamics have followed a strong downtrend, lowering almost at every data release. As for inflation, while on the rise in the first quarter, culminating at a 5.40% y/y rate, we can clearly see a swift turn to the downside.
Meanwhile, unemployment has been steadily rising, increasing from 3.7% in January to 4.3% in July. This has been accompanied by weakening NFP data, with July’s figure revised down to 89K from the initial 114K, and August showing a rise to just 142K, falling well below expectations.
These are clear signs of a rapidly cooling US economy. With the key rate remaining at its highest level for 13 consecutive months, we can confidently say the Fed’s restrictive monetary policy has had its effect. But is it now time to lower the rates?
A closer look at Inflation and Core Inflation monthly dynamics reveals a concerning trend — both are rising again after a brief decline until June.
On the one hand, combined with positive unemployment data (a 0.1% rise in August) and stable PPI figures, this likely eases concerns about a recession this year. On the other hand, it limits the Fed’s room for easing, as they may wait for more confirmation before making dovish moves.
With the ECB already cutting rates last Thursday, global stimulus-driven monetary policy seems poised to take hold.
Fed’s interest rate desicion: All scenarios
For all the reasons mentioned, the Key Rate is likely to be reduced by only 0.25% this time, despite markets pricing in a 40% chance of a 0.5% cut as of September 13. Here is an overview of all possible scenarios that await us today:
- 50 bps cut. This overshoot in high interest rates, coupled with a pessimistic Fed fearing an imminent recession, could lead to a significant drop in the USD. Consider going long on Forex pairs where USD is the quote currency (CADUSD, EURUSD).
- 25 bps cut. This would indicate a significant victory over inflation and recession fears. The dollar is likely to weaken, and global securities are expected to rise strongly. Be aware that a correction in long positions is quite possible. Whether the dollar falls initially or rises right away, consider going long on Forex pairs where USD is the quote currency (CADUSD, EURUSD).
- 0 bps cut. Though highly unlikely, it’s still possible that the economy remains strong, the recession threat diminishes, and the USD unexpectedly and rapidly strengthens. In this case, consider shorting Forex pairs where USD is the quote currency (CADUSD, EURUSD) and wait for next month’s meeting for further clarity.
Whatever the outcome will be, today presents a great opportunity for traders. Prepare for trading, use Headway’s unlimited leverage, and advance on your journey to success. Start now!
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