Powell to strike a “nothing to see here” message to markets at Fed meeting later

“There will be no updated macroeconomic projections or dot plot this month, so market participants will be reliant on the bank’s rhetoric in both the statement and Powell’s presser. With limited new information to go off, we expect the bank’s statement to remain broadly untouched from September.

“In it, the Fed will probably underscore the threats to employment, possibly noting that these risks have increased and that the shutdown has made the decision making process more difficult.

“Yet, upside risks to inflation continue to provide a headache, and should elicit a cautious response, even if policymakers deem the effect of the tariffs on consumer prices to be temporary. While there remains a clear gap in rate expectations between the Fed (three more cuts through to the end of 2026) and futures (five), we do not expect Powell to make any attempt to endorse the market's view at this juncture.

“Powell will again need to walk a delicate line between signalling further cuts, while simultaneously keeping expectations in check. Now more than ever, we think that Powell will want to strike a non-committal note that effectively sends a “nothing to see here” message to market participants.

“We think that the Fed has a tough task on its hands. In our view, the state of the US labour market strongly supports the case for additional rate reductions, but upside risks to inflation necessitate restraint.

“Prior to the federal closure, we were calling for two further cuts from the Fed this year in October and December, a view that has not changed given the lack of official data releases to alter our position. The path for policy in 2026 is less clear and will be highly dependent on incoming data, as and when we receive it.

“Assuming that the Fed dances to the tune we’re expecting and does its utmost to keep market waters calm on Wednesday, then we could see an unusually muted reaction in the dollar. Futures markets are as near as makes no difference fully pricing in 25bp cuts in both October and December, so a rate reduction this month, combined with a nod at another at the next meeting, would be taken in stride by markets.

“Signs of greater dissent in the FOMC and/or more dovish remarks that doubles down on labour market fears would be bearish for the greenback, whereas a beat in Friday’s CPI data, followed by rhetoric that raises alarm bells over entrenched tariff-induced inflation, could provide some support.”