BAML (Meyer, Cabana): They look for the FOMC to cut rates by 25bp to a range of 1.75-2.00. The case for a cut has increased since the July meeting as the data flow in the US has softened and uncertainty remains in the outlook. Expect the policy statement to continue to signal optionality toward additional cuts contingent on the data flow and the evolving outlook. They expect Chair Powell will reinforce the policy statement by striking a more dovish tone during his press conference – acknowledging the challenges to making policy due to trade policy uncertainty and leave the door open for future cuts and not explicitly characterize the latest policy actions as a “mid-cycle adjustment”. The dots should show a Committee willing to further ease policy with the median dot signaling 75bp of cumulative cuts this year, matching current market expectations. Thereafter, they expect the FOMC to show it will hold rates at these levels through 2020 before signaling a gradual tightening in 2021 and 2022. There is risk that the median dot holds at 1.625% in 2021 and a subsequent steeper policy tightening in 2022. In either scenario, BAML think the level of the fed funds rate at the end of 2022 stays below the Committee’s longer run dot The decision to cut is unlikely to be unanimous with hawkish dissents from Rosengren and George and potentially a dovish dissent from Bullard. Rates markets should interpret the Fed’s actions to be dovish, which could spur a front-end rally and modest steepening of the curve, which in turn could weaken the dollar.

BMO: (Gregory) Argues the three main motives for the July rate cuts, namely weaker global growth, increased trade uncertainty, and muted inflation pressure remain in place – hence are expecting another 25bps cut. They see little changes in the statement though the labor market assessment could be downgraded a bit, from being “strong” with “solid” job gains. Among the voters, there will likely be some dissent again. In July, Kansas City President George and Boston’s Rosengren both dissented in favor of no rate cut. BMO wont rule out a dissent on the other side, in favor of a 50 bp rate cut with St. Louis President Bullard the likely candidate. In the ‘dots’, they see a 1.875%, 1.875%, 2.125% profile, with a good chance 2021 could make it a 1.875% flush and anticipate the longer run will remain at 2.50%

Danske: (Mihaj) Expect Fed will cut rates by 25bp, as two out of the three important factors explaining the July cut (higher (trade) uncertainty, slower global growth and subdued inflation) have worsened since then (Trump escalated the trade war and data out of China and Europe have disappointed). They do not expect the Fed to change much in the statement and believe it will repeat its easing bias (‘act as appropriate to sustain the expansion’). The dot plot will lower automatically, simply reflecting that the Fed will have cut twice since last time (assuming the September cut is a done deal). They think the Fed will signal that another cut may be on the cards this year, otherwise, in our view, it is a hawkish signal, compared with both our view and market pricing. While they do not think the Fed will pre-commit to further easing (although it will repeat its easing bias), they still expect four more cuts after the one next week, taking the target range to 0.75-1.00% at the March meeting

HSBC (Wang): Since the prior meeting, a recent GDP revision and an estimated revision to payroll employment paint a clearer picture of a slowdown in economic growth and job growth over the past year. Market-based inflation breakevens have fallen since the July FOMC meeting, a development that they believe will strengthen the case for rate cuts in the eyes of some of the policymakers. They expect the FOMC to cut the federal funds target range by 25bp to 1.75-2.00% at the 17-18 September policy meeting and look for one more 25bp rate cut at the subsequent meeting in October. They expect one or both George and Rosengren to dissent against the rate cut, perhaps with a view that the US economy is still in a good place and that rate cuts could exacerbate financial stability concerns related to corporate leverage and equity prices being close to record highs. They expect the FOMC’s median projection for the federal funds rate at the end of 2019 to fall sharply to 1.625%, consistent with a total of three 25bp rate cuts this year. HSBC are less confident about how the dot plot projections will look for subsequent years. With the policymakers still generally describing the outlook for the economy as favorable, they doubt that the median projection for 2020 will indicate further rate cuts. The more relevant question may be how long each policymaker anticipates that unchanged policy rates will be appropriate before they start to rise again later in the projection horizon.

MS: (Hornback, Zettner) Expect a 25bp cut to 1.75-2.00% in an attempt at continued risk management. Make only minor adjustments to the modal forecasts in the SEP that bake in additional policy easing to maintain growth and show a less dovish policy path than market expectations given policymakers are asked to place their dot where they think the policy rate should be. Unlike market expectations, the Fed will not yet view this as a cutting cycle. Stress downside risks and maintain an easing bias. MS expect an additional 25bp cut to follow at the October 29-30 meeting.

GS: (Hatzius) Expect a 25bp cut this week another in Oct. concluding what Powell termed a ‘mid-cycle adjustment’. With growth remaining somewhat soft but wage and price measures looking a bit firmer, GS see only minor changes to the FOMC statement, which is likely to repeat the intent to “act as appropriate” but again draw hawkish dissents from Presidents George and Rosengren. They also expect only small tweaks to the economic projections to show a bit less growth and a bit more inflation next year. They say the most important question for this meeting is how many participants will project additional rate cuts. They expect the dots to show that a substantial minority, roughly six participants likely including the Chair and Vice-Chair, expect a third cut later this year. Such an outcome would send a strong signal of a third cut and would not be taken as particularly hawkish by investors, even though the median dot would not show further easing. Beyond 2019, they expect the dots to show one hike in each of 2020 and 2021 (or possibly 2021 and 2022), returning the funds rate to 2.25-2.5%, close to an unchanged longer run or neutral rate of 2.5%.

Jefferies: (McCarthy, Simons) 2019 dots to reflect this mixed opinion, with the majority (and the median) reflecting the September cut to a 1 ¾% to 2% target range, but no further cuts this year. Some dots will remain at the current target range of 2 to 2 ¼%, including those of the two dissenters, George and Rosengren, as well as some of their hawkish colleagues. About as many doves will submit dots that reflect another 2019 rate cut. Further out, they expect modest downward adjustment to the dots, such that that 2020 median is unchanged from 2019 at 1.875% and the 2021 median reflects a return to modestly higher rates with a 2.375% median. The 2021 median is unchanged from the June SEP, but we expect that the dot distribution will shift a little bit lower. The first cut of 2022 forecasts is a tough call, but we expect that the median will be unchanged from 2021 at 2.375%, with the dots drifting only modestly higher from the prior year. For the long-run, we expect the whole distribution to shift down 25 bps. The new median will be 2.25%, down from 2.50% Jefferies do not expect significant changes to the economic projections. It is important to keep in mind that the ethos behind the “mid-cycle adjustment” is heightened uncertainty, not a deterioration of economic conditions or the outlook

JPM: (Feroli) Expects the 25bp cut with George and Rosengren dissenting again. They expect the median interest rate “dot” projection will indicate no further easing are expected this year, and that policy rates are expected to be on hold next year as well. Little changes to the statement which will continue to note that “uncertainties about [the] outlook remain” which the Fed “will continue to monitor” and “will act as appropriate to sustain the expansion.” Changes to any of these phrases (not our expectation) present a hawkish risk that would signal some pushback against expectations of subsequent easing this year. In the press conference JPM expect Powell to clarify and expand upon the meaning of a “mid-cycle adjustment.”

Nomura (Alexander, Buckly): Since the meeting in July, risks to the outlook have increased. Markets continue to expect substantial further easing. Another rate cut would be consistent with the Fed’s heightened concern about inflation’s underperformance and recognition of the benefits of allowing the labor market to remain strong. However, the Committee remains divided and this makes more aggressive action – such as a 50bp cut – less likely. We will receive an updated economic forecast that should provide some additional clarity. The new policy rate forecasts are likely to provide a better sense of both how many cuts the Committee expects to deliver over the forecast horizon and how persistent the remaining division will be. Overall, Nomura expect the FOMC and Chair Powell to indicate that they are prepared to deliver more easing, if needed, to extend the expansion. However, in the absence of a consensus on the Committee, they do not expect Powell’s comments to be very forward-looking.

Natwest (Girard, Cummings) In-line with consensus, the expect a 25bp rate cut but see greater uncertainty on what the Fed signals about future action (or lack thereof) beyond the September meeting. Regarding ‘dots’, they expect they will show a split between those FOMC participants who see the (presumed) 50 bps insurance cuts taken to date (i.e. July and September) as sufficient and those who believe more action beyond September will be needed. Their base case is for the median year-end 2019 fed funds estimate to drop to 1.625% for 2019, though it is a very close call. In the statement, only fairly modest changes expected vs July. However, most of the changes in the summary of current economic conditions paragraph are likely to be in the direction of slightly softer activity. The opening line that characterizes the labor market could be downgraded slightly (from “strong” to “solid”), while economic activity is likely to again be described as having risen at a “moderate” rate. Meanwhile, the statement may also acknowledge the recent moderation in payrolls: “job gains have moderated” (instead of July’s reference that job gains have “been solid, on average, in recent months”). They expect tweaks to the policy statement will affirm the market’s expectation for more easing to come

Citadel: FOMC today and difficult to see how the dovish bias is not retained despite the modestly better domestic data. Trade issues remain unresolved and additional geopolitical uncertainty now injected given the Saudi situation should leave the FED striking a cautious tone. Market fulling expecting a 25bps cut and we also anticipate an additional 5bps cut to IOER given recent funding issues. It also seems likely that the FOMC will announce intentions to stabilise the levels of reserves as it becomes apparent that currently there is a palpable reserve shortage. Overall, looking for the positive price action to continue.

CITI: Although the outcome of the September policy decision is all-but-certain to be another 25bp cut, we see slightly hawkish risks to the meeting.

The updated dot plot may show a median dot indicating no further rate cuts this year, in line with our own base case for no further cuts in 2019 or 2020.

Recently higher repo and fed funds rates raise the risk of a 30bp reduction in IOER, but our base case is for a 25bp cut.

Chair Powell is unlikely to repeat the characterization of cuts as a “mid-cycle adjustment,” which was a hawkish surprise in July. While Powell will likely present an upbeat view of the consumer-driven US economy, downside risks mean he will emphasize that the Fed remains committed to “act as appropriate to sustain the expansion.”

TD:
• We expect the Fed to cut rates by 25bp and leave the door open to further easing. The dot plot should reflect a number of FOMC voters projecting 75bp of total cuts this year, but not enough to move the median lower to that level. Presidents George and Rosengren should dissent again at the meeting.

• Rates: The market is fully priced for the 25bp cut. Given that the market is pricing in additional 60bp of cuts by end-2020, forward guidance will be key. Our base case is one of disappointment, resulting in a bear flattener.

• FX: Focus on dot plot. But, unless the Fed provides a firm dovish surprise, the USD should trade with a firm bid tone. EURUSD likely re-challenges 1.0925 key support. USDJPY to remain in broad 107/109 range but upside risk.