Week ahead: All about the Fed

We have officially entered the run-up to Christmas, but many of us will have to put aside festive distractions and mince pies – at least for a while longer. This week’s focus is on updates from four key central banks. The RBA, the BoC, and the SNB are all expected to hold, while the Fed is likely to lower its target rate, which will undoubtedly be the macro spotlight. Next week will also bring updates from the BoE, the ECB, the BoJ, and the RBNZ.

US Equity benchmarks wrapped up last week modestly on the front foot. Despite Friday’s session offering technicians daily bearish shooting star patterns across the board, indices remain on the doorstep of refreshing record pinnacles amid rising expectations of another Fed rate cut. In the FX space, this also pushed the USD lower, resulting in another week of softness with the USD Index down 0.5%.

Fed cut widely expected

The Fed rate decision will be announced on Wednesday at 7:00 pm GMT. Money markets are pricing in -21 bps of easing at the upcoming meeting (84% probability [up from around 79% a week ago]), with a -25 bp cut bringing the target rate to 3.50% - 3.75% (3.625%). The slew of dovish Fed speak and softening labour-market conditions led to notable rate repricing ahead of this week’s meeting.

Accompanying the rate announcement are the usual rate statement and press conference, though this meeting will also feature updated economic estimates from the Summary of Economic Projections (SEP), released quarterly. With a rate cut largely baked in, attention will shift to the communication, particularly from the SEP and Fed Chair Jerome Powell.

Ultimately, I believe the Fed will vote to cut the target rate by 25 bps this week. Still, it will not be unanimous, with hawkish dissenters likely in the mix, such as Fed Governor Jeffrey Schmid, Chicago Fed President Austan Goolsbee, St. Louis Fed President Alberto Musalem, and Powell. Their justification will be a lack of official data and persistent inflationary pressures.

The delayed September PCE inflation data should help support a rate cut. Released last week, the YY core PCE figure came in slightly less than expected at 2.8%, from 2.9% in August, while the headline YY PCE number aligned with market expectations, rising by 2.8%, from 2.7%. This, to me at least, shows that the data is stable but sticky, and while I feel this seals the deal for this week’s meeting, how the Fed proceeds in 2026 is more ambiguous.

A cumulative -87 bps worth of cuts is currently implied until the year-end 2026, meaning two cuts are fully priced in, and a third is uncertain – this is because we know that a new Fed Chair will enter the mix next year!

All eyes on Fed dots!

The dot-plot projections will be key to watch and could drive the market’s response.

However, given the divide among policymakers, it is unlikely we will see a drastic move in the dots, potentially leaving them at 3.375% in 2026 – so one more cut next year, assuming a cut this week. This is because policymakers are still uncertain and know little more than they did when they published September’s SEP, due to the prolonged US government shutdown.

However, it is worth noting that it will only take one or two dots moving lower to price in cuts next year! So, keep an eye out for this, as a move south would weigh on yields and the USD, while likely underpinning Stocks and Gold. The same can be said if we see the dots move higher, essentially showing that policymakers expect no cuts in 2026, which will naturally be positive for yields and the USD and negative for Stocks and Gold. While the dots could be left as is, I am expecting a moderate uptick in the unemployment and inflation projections this year.

Adding to the uncertainty heading into 2026, Trump's forthcoming choice for Fed chair – widely expected to be NEC Director Kevin Hassett – could reshape expectations for 2026. Investors have expressed concerns that Hassett may prioritise Trump's preferences for aggressive easing, potentially sparking higher inflation and volatility.