Fed September Review – No rush for more 50 bps cuts
Welcome to our “Fed review”. The two meaningful takeaways from the Fed meeting were the 50 bps cut and “no rush” for further 50 bps cuts. Regardless, the Fed is very eager to not repeat the “transitory inflation” communication mistake of 2021 and will likely cut further 50 bps if labor market data deteriorates.
Event summary
The initial kneejerk reaction to the 50bps cut was a 50 point move down for the dollar index (DXY). The “dot plot” was as expected & the forward guidance was open-ended, which leaves the door open for further 50 bps cuts depending on labor market data.
·The press conference caused a significant reversal as the Fed suggested the move was a re-calibration, they are in no rush to cutting and the market should not expect this as the new “pace”. On the dovish side, the Fed signaled a commitment to “not get behind”. Rest of the language was as expected, with the dovish labor markets and inflation commentary being in the price
In our playbook this was the “moderately dovish” scenario, with a “moderately hawkish press conference”.
Thoughts on providing scenarios for future
We got off to a strong start with our Substack experiment as the dollar index behaved almost exactly as anticipated on our moderately dovish scenario. However, without a doubt, and to avoid looking like fools in the future, we want to stress our scenarios wont always be quite this accurate.
The main usage for our scenarios is to provide a rough playbook what will happen on a given event. As we spoke earlier, we use these scenarios to trade the events. In this event we went long USD across a basket of currencies with small risk as we thought market had overreacted to the 50 bps cut, after the Powell comment on “recalibration” and “no rush”.
Stay tuned for monthly previews and ad hoc topics on event trading! Feel free to give your feedback on what kind of content you would be interested in the future in the comment section below.
