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cailianshe news, september 18 (editor: xiaoxiang)for the global financial market, tonight is destined to be a sleepless night...

according to the schedule, the federal reserve is scheduled to announce its september interest rate decision at 2 a.m. beijing time on thursday.it is generally expected in the industry that there is basically no suspense that the federal reserve will announce the first interest rate cut in four years at this meeting.

but at the same time, this is also the most "mysterious" or most uncertain federal reserve interest rate meeting night in recent years:although the market has collectively determined that the federal reserve will cut interest rates this month, there is still fierce controversy and disagreement over how much fed policymakers will cut interest rates - whether to cut interest rates by 25 basis points in a more traditional way, or to take a more radical first step in easing in the form of a direct 50 basis point cut.

all this indicates that the market fluctuations tonight and even during the asian session on thursday are destined to be not calm!

the biggest suspense tonight: will the interest rate be cut by 25% or 50%?

if we compare the dramatic changes in expectations before tonight's fed decision with past fed rate meetings, it may be difficult to find similar ones. but if we look around the world, there is a case that is actually very similar to tonight - the bank of japan's decision in july (one of the culprits that triggered the "black monday" in japanese stocks in august).

before that bank of japan decision, the mainstream expectation in media surveys was that the bank of japan would remain on hold. however, on the eve of the decision, japanese media, as the "mouthpiece" of the bank of japan, suddenly leaked that the bank of japan would raise interest rates, which subsequently triggered bets in the interest rate futures market to quickly move towards a rate hike. the bank of japan ultimately "unexpectedly" but not unexpectedly raised interest rates to 0.25%.

this time, the market's prediction of the fed's interest rate changes is almost the same: after the release of important economic data such as non-agricultural and cpi and the fed officially entering a quiet period, the mainstream expectation is that the fed will only cut interest rates by 25 basis points this week. however, since last weekend, with the famous journalist nick timiraos and his colleagues known as the "new fed news agency" repeatedly stating that "the extent of the first rate cut is still uncertain", "the fed should cut interest rates by 50 basis points this month", and senior figures such as former new york fed chairman william dudley calling on fed policymakers to take more aggressive actions, the possibility of a 50 basis point rate cut has instead prevailed on the eve of tonight's interest rate meeting.

(nick timiraos and his colleagues have been “setting the pace” in the past few days: equivalent to building momentum for a 50 basis point rate cut)

the following comparisons may reflect the "drama" of the market's expectations for the rate cut at this fed meeting:

in terms of media surveys, only 9 of the 114 institutional economists surveyed by bloomberg expected the federal reserve to cut interest rates by 50 basis points tonight, and the vast majority (105) of the economists surveyed believed that the federal reserve would "only" cut interest rates by 25 basis points.the results of the relevant media survey are actually the expected values ​​of interest rate changes tonight that many chinese investors saw in the financial calendar of domestic media.

generally speaking, such one-sided media survey expectations usually lock in the federal reserve's 25 basis point rate cut tonight. however, investors who have paid attention to overseas market trends during the mid-autumn festival obviously know that the above survey expectations are actually seriously "outdated" compared to the expected changes in the real-time interest rate futures or swap markets.

for example,cme's "fed watch tool" currently shows that traders in the interest rate futures market have recently estimated that the probability of the federal reserve cutting interest rates by 50 basis points tonight is as high as 64%, while the probability of cutting interest rates by 25 basis points has shrunk to 36%.

in addition, according to data compiled by the industry, the number of open contracts for october federal funds futures, which investors use to bet on the federal reserve's interest rate meeting this week, has now jumped to the most extreme level since the derivative was launched in 1988. most of these new bets are betting that the federal reserve will cut interest rates by 50 basis points this month, and the surge in related positions has been particularly significant since this week - new positions in the past two trading days account for almost a third.

given that federal reserve officials are currently in a "quiet period" and cannot speak publicly before the interest rate decision, many market participants have actually regarded the article by nick timiraos and others as a secret "leak" by the federal reserve.therefore, the fed’s decision tonight is almost destined to be very “interesting”: if the fed cuts interest rates by 50 basis points, it will be a result that does not meet the general expectations of media organizations’ surveys, and the market is bound to be “shaken”. if the fed cuts interest rates by 25 basis points, it will be “contrary” to the position layout of a large number of interest rates, bonds, and stock markets in the past few days, and it will trigger a “big earthquake” in the market…

as the well-known financial blog zerohedge said, the market is destined to usher in "surprises" tonight. not only are there differences in expectations between a 25 basis point and a 50 basis point rate cut, but the gap between the current market consensus (nearly 70% believe that the rate cut will be 50 basis points) and the forecasts of economists (92% believe that the rate cut will be 25 basis points) has never been so large.

in fact, even within the federal reserve tonight, there may be some controversy over whether to cut interest rates by 25 basis points or 50 basis points.an interesting point is that until the latter part of last week, investors expected the fed to cut interest rates by only 25 basis points, as few officials publicly called for a larger rate cut. however, we have previously introduced that within the current fed, chairman powell may be a "dove" who wants to implement loose policies with greater force. the recent leaks from the fed's mouthpiece media and the shift in market expectations may not be the result of fierce internal game play within the fed.

"i guess there are differences of opinion among them," former dallas fed president kaplan said on tuesday. "some people here will feel the same as i do, that they are a little late in action, they want to take steps and don't want to spend the fall chasing the economy. and from a risk management perspective, some people just want to be more careful."

"the key issue they face at this meeting is their perception of the balance of risks. if they are more worried about growth and employment than inflation now, then they are likely to want to be more cautious and cut interest rates by a larger amount of 50 basis points," said william english, a former senior fed adviser.

in addition to the rate cut, don't forget to pay attention to the dot plot

in addition to the suspense of whether the fed will cut interest rates by 25 basis points or 50 basis points, there is another key point tonight that investors cannot ignore - that is, as a quarter-end resolution, the fed will also release the latest summary of economic projections (sep), covering fed officials' expectations for the economy, inflation, and unemployment rate in the next three years, which will also include the famous interest rate dot plot. the latest sep will include forecasts from 2024 to 2027.

in the dot plot, each fed official will lay out in a chart their views on where interest rates will go in the next few years. and tonight, the fed officials' predictions about where interest rates will be at the end of this year and next are likely to be just as important as the specific amount of the fed's rate cut this time.

in their june dot plot, fomc members projected just one rate cut by year-end—a forecast that will almost certainly be updated as markets price in as many as five 25 basis point cuts, or a total of 125 basis points, with just three meetings left.

in addition, according to cme's fedwatch tool, traders currently expect the fed to continue to cut interest rates further next year, reducing the current benchmark rate by 250 basis points before stopping the rate cuts, and the interest rate will fall below the key 3% integer mark by september next year.

some economists said that compared with the magnitude of the first rate cut, the more important question of this meeting may be how low the fed will eventually lower interest rates and how long it will take to achieve this goal. some analysts, including luke tilley, chief economist at wilmington trust and a former fed official, expect the fed to cut interest rates more aggressively, lowering the rate to 2.5% next year.

economists at citibank said that given the fed's level of anxiety, the central bank is likely to cut interest rates by at least 50 basis points multiple times in the coming year.

it is worth mentioning that there is actually a huge "gap" between the latest interest rate market expectations and the fed's june dot plot - the difference in interest rate position at the end of next year is as much as 125 basis points (red arrow in the figure below). if the dots in the september dot plot do not move downward enough, it may also trigger a risk shock wave for the entire market.

elsewhere in the summary of economic projections, the industry currently expects that the biggest adjustment at this meeting may be in the unemployment rate.the fomc will almost certainly raise this year’s unemployment rate from the 4.0% forecast in june, as the current unemployment rate is 4.2%. the core inflation rate forecast for this year, which was 2.8% in the june forecast, is likely to be revised down, as the core inflation rate in july has fallen back to 2.6%.

note: economic forecasts from the federal reserve's june meeting

"inflation looks set to be lower than the fomc forecast in june, with high inflation earlier this year increasingly looking like a seasonal remnant rather than a reacceleration," goldman sachs economists said in a note. "as a result, a key theme of the meeting will be a shift in focus to labor market risks."

what will be the highlights of the fed’s statement and powell’s press conference?

in addition to adjustments to the summary of economic projections, the fomc's post-meeting statement is also bound to change to reflect the rate cut, and the committee may also add or modify some forward-looking guidance.some industry insiders said there could be several changes in the wording of the fed's statement, including around the balance of risks between employment and inflation.

goldman sachs expects the fomc "is likely to revise its statement to be more confident about inflation, characterize inflation and employment risks as more balanced, and reemphasize its commitment to maintaining maximum employment."

julia coronado and laura rosner-warburton, strategists at macropolicy perspectives, also said the fomc is likely to adopt language similar to that used by governor waller on sept. 6 that “the balance of risks has shifted toward the employment side of our dual mandate.”

however, jefferies economist simons pointed out, "i don't think they will give any forward guidance in a particularly specific way. at this stage of the cycle, forward guidance is actually not very useful because the fed actually doesn't know what it is going to do."

finally, given that no matter how the fed cuts interest rates tonight, it may cause violent market fluctuations, how federal reserve chairman powell will display his "rhetoric" to appease the market at the press conference at 2:30 a.m. beijing time on thursday may also be a major highlight tonight!

many industry insiders said thathow powell "explains" the extent of the rate cut (such as 25 basis points or 50 basis points) will affect the volatility of financial markets tonight. if he hints in his speech that the fed is ready to cut interest rates further or expresses concerns about economic risks, the market may adjust its investment strategy accordingly.

bi strategists ira f. jersey and will hoffman said that if the fed's interest rate outlook changes, the short-term interest rate market may adjust quickly after the initial reaction. but the biggest possibility is still: powell emphasized in the post-meeting press conference that he will continue to "depend on the data."

given that there is only one and a half months left until the us election in november, if the federal reserve really cuts interest rates by 50 basis points tonight, how powell responds to the controversy that his decision may interfere with the election situation may also attract attention.