If we take a stroll down memory lane, this time last year we found ourselves in a very similar position. The market had priced in a guaranteed -25bps cut going into the September 2024 Fed meeting, with roughly 50/50 odds of a -50bps cut. At that time, the effective Fed Funds rate was 5.33%, and the market was anticipating several more cuts. Had things played out as expected, the Fed Funds rate would have fallen to 3.0% by now. Fast forward to today, the Fed Funds rate sits at 4.33%, following only three cuts totaling -100bps.
Looking back, it’s clear the Fed was unknowingly frontloaded when it delivered a -50bps cut a year ago, given what we know today surrounding the data. However, the data today is telling us a much different story. Interestingly, this upcoming meeting bears a strong resemblance in terms of evaluating whether a -50bps cut is appropriate. While the market seems to have backed away from that expectation (despite pressure from Washington to do otherwise), the forward-looking narrative remains eerily familiar. The chart below shows what the market has priced in for one year from today. In 2024, we expected 200bps in cuts from 5.33%, targeting a 3.00% Fed Funds rate. A year later, we’re targeting that same level for September 2026.
Why does this matter? Because what will impact us tomorrow has less to do with the current cut on the table (assuming -50bps is off it) and more to do with the forward guidance shaping it. Consider the Dot Plot (the voting members’ forecast of the Fed Funds rate) released at the last meeting. By the end of 2026, the expected rate is 3.625%, which diverges from current market expectations. A lot has changed since July’s meeting, especially the data, and how the Fed responds will determine whether we get a dovish cut (market-friendly) or a hawkish one (less so). Will the Fed converge toward market expectations, or will it be less accommodative than hoped?
Timing would have it that we’ll get Retail Sales data this morning, which will offer insight into consumer strength and whether growth outlooks are sustainable. With a weakening labor force, demand and purchasing power are helping keep recession fears at bay. If the consumer shows signs of weakening alongside the jobs market, that could influence Powell’s tone tomorrow.
We get one more day to deliberate and as the market positions itself accordingly, I encourage your to do the same! Based on last year’s result, we can’t ever rule out a plot twist… and let’s not forget tomorrow who’ll be holding the pen.