Live Coverage: Fed to surprise rock Gold, stocks, US Dollar in any of these four scenarios

Will it be a 25 or a 50-bps Fed cut? Uncertainty about the cut is rare, and there are other factors such as the dot plot and Chair Powell's conference. Live coverage of a critical event for Gold, stocks and the US Dollar. 

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Fed decision critical for global markets

The Federal Reserve is set to cut rates – first and foremost because Fed Chair Jerome Powell said it clearly in Jackson Hole. However, there is significant uncertainty. At the time of writing, bond markets price a 63% chance of a 50-bps rate cut, and a 37% chance of 25-bps move. Uncertainty about the size of the move is rare – there is room for high volatility.

The second question is: are officials cutting because they are confident about having won inflation or fearful or a recession? There is a big difference. 

Here are four scenarios:

1) Big cut, confident message: Stocks, Gold bullish, US Dollar bearish. In this scenario, Powell gives markets what they want without causing panic. A cut due to falling inflation—and with a scenario of a soft landing—is the best possible outcome. High probability. 

2) Small cut, confident message: Whipsaw: stocks and Gold initially fall, the US Dollar initially rises, then stocks recover, the US Dollar falls, but Gold struggles to recover. A 25-bps cut would be disappointing and trigger a knee-jerk reaction. However, confidence in the economy and an open door to cut faster later would cause a reversal. Medium-high probability. 

3) Big cut, concerned message: Whipsaw: stocks and Gold initially rise, the US Dollar falls, then the Greenback bounces, stocks fall, while Gold holds onto its gains. A 50-bps cut is good news, but if it comes for the wrong reasons, the picture changes. Worries about a recession would send equities down, and the US Dollar would receive safe-haven flows. Medium probability. 

4) Small cut, concerned message: stocks down, Gold down, the US Dollar rises, then Gold recovers. In this scenario, the Fed begins small but is worried about the economy. That is a double blow for equities, and a double boost for the Greenback – which benefits from higher rates and also safe-haven flows. Gold suffers before recovering on hopes of lower rates. Low probability. 

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