Fed meeting preview: what traders need to watch this week

​​​Market consensus points to 25 basis-point rate cut

​The Federal Reserve (Fed) is widely expected to deliver a 25 basis-point rate cut at its 16-17 September meeting. Markets have fully priced in this move, with futures contracts showing near-100% probability of easing.

​This anticipated cut would bring the federal funds rate down from its current 4.75% level. The move comes as policymakers respond to weakening labour market signals across multiple economic indicators.

​Recent economic data has shown cooling job growth and rising unemployment claims. These developments have strengthened the case for the Fed to begin easing its restrictive monetary policy stance.

​Traders are positioning for this outcome, but the devil will be in the details. The Fed's communication around future policy moves could prove more important than the cut itself.

​Economic backdrop supports easing case

​Inflation remains above the Fed's 2% target, with both consumer price index (CPI) and core CPI readings still elevated. However, the pace of disinflation has provided enough comfort for policymakers to consider rate cuts.

​Labour market data presents a more compelling case for easing. Payroll growth has softened considerably, while unemployment has ticked higher in recent months.

​Forward-looking indicators suggest labour market slack is building across the economy. This trend reinforces the argument for the Fed to pivot from its restrictive policy stance.

​Credit conditions remain tight despite recent improvements in financial markets. Consumer delinquencies are rising, adding another layer to the case for monetary easing.

​Dot plot projections hold key insights

​The Fed's quarterly projections, known as the "dot plot", will be closely scrutinised for future rate guidance. These projections show where individual policymakers expect rates to head over time.

​Market participants are particularly interested in whether officials anticipate additional cuts before year-end. Current expectations point to at least one more reduction beyond September's anticipated move.

​The dot plot could reveal whether Fed officials are aligned with market expectations. Any divergence between policymaker views and market pricing could trigger significant volatility.

​A more hawkish dot plot could disappoint traders expecting aggressive easing. Conversely, a dovish shift could fuel further gains in risk assets and pressure the US dollar.

​Upside risks could limit dovish pivot

​Several factors could restrain the Fed's dovish pivot despite labour market cooling. Core services inflation remains particularly sticky, especially in shelter and healthcare costs.

​Tariff-related pressures and resilient consumer spending could slow the disinflation process. These dynamics might encourage some Fed officials to advocate for a more cautious approach to rate cuts.

​Political and institutional tensions add another complication to Fed communications. Pressure from various actors could influence how aggressively the central bank signals future moves.

​Some policymakers may prefer to "pause after September" to reassess economic conditions. This cautious stance could temper market hopes for a prolonged easing cycle.

​Potential for more aggressive easing

​While upside risks exist, several factors could push the Fed toward more dovish policy. The labour market's deterioration appears to be accelerating beyond policymakers' expectations.

​Consumer spending patterns show signs of strain despite headline resilience. Rising delinquency rates across various credit categories suggest household financial stress is building.

​Business investment has cooled, and forward-looking surveys indicate further weakness ahead. These trends could convince Fed officials that more aggressive easing is necessary.

​A sharper-than-expected economic slowdown could prompt the Fed to guide towards two or more additional cuts. This scenario would likely support risk assets while pressuring the US dollar further.

​Key factors for traders to monitor

​Jerome Powell's press conference tone will be crucial for market interpretation. Whether he frames the move as part of a "series of cuts" or a "mid-cycle adjustment" matters significantly.

​The Fed's economic projections beyond the dot plot deserve attention. Updates to gross domestic product (GDP) growth, unemployment, and inflation forecasts will provide context for policy decisions.

​Market reaction in the immediate aftermath could set the tone for weeks ahead. If the Fed sounds overly cautious, equities and Treasuries may pare recent gains.

​A more dovish tilt could see 10-year Treasury yields drop further while supporting risk assets. Forex trading opportunities may emerge as dollar positioning adjusts to new Fed guidance.