Amherst (Stanley): “I remain skeptical of the wisdom of a third straight rate cut, but Fed officials failed to push back against market expectations of an easing this week, so I have to assume, along with everyone else, that the Committee intends to go along with what has been priced in. The 1995 and 1998 episodes that Chairman Powell and others have cited as examples of a “midcycle adjustment” each consisted of three rate decreases, so there is a presumption that if the Fed lowers rates this week, it will send some sort of signal that it intends to pause or at least that the bar for additional cuts will be higher. Unless the statement language is quite explicit, however, my guess is that at some point over the next six weeks, the bond market will test the Fed’s nerve by making a run at pricing in yet another cut for December. Eventually, the Fed is going to have to gather the nerve to push back, but, so far, the Fed leadership has yet to do so.”

Barclay’s (Setia): See a risk that the Fed may surprise on the hawkish side by emphasizing the cumulative rate cuts so far, which investors may interpret to mean that it does not intend to cut more. After having delivered three cuts, the Fed may want to highlight its data dependence. At the September meeting, the Fed noted that it “will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” Barclays highlight Clarida comments noting that “the Committee will proceed on a meeting-by-meeting basis to assess the economic outlook as well as the risks to the outlook, and it will act as appropriate…” They think the Fed could simply include the phrase “meeting by meeting” to highlight that it is data dependent. At the press conference, Barclays think Powell will have to walk the fine line between signaling what the Fed has accomplished and being prepared to cut further; the more he skews his responses towards a comparison with 1995 and 1998 cuts, the greater the hawkish surprise will be, in their view.

Danske (Mihaj): It is more difficult to predict Fed actions than previously, as policymakers disagree on the best way forward. There were three dissents last time (two voting for unchanged, one voting for a bigger cut), which is a lot looking back at Fed actions historically. However, Danske think the Fed would have been more proactive in talking down market expectations more explicitly if it was not easing again. They also believe it makes sense to ease when looking at the data. Global political uncertainty has eased, particularly with the US and China back at the negotiating table, but it remains elevated without any permanent trade deal. Global growth remains weak, although we have seen some early signs of stabilization in China. Survey based long-term inflation expectations from both the University of Michigan and the NY Fed have declined to new lows, while actual inflation remains subdued. US domestic growth has showed early signs of weakness, with low ISM and Markit PMI indicators and slower job growth. In terms of forward guidance, Danske do not expect major changes to the statement but note that the minutes showed FOMC members discussed whether to include some forward guidance on when to expect the Fed to end rate cuts for insurance reasons. Danske expect the Fed to keep the sentence that it ‘will act as appropriate to sustain the expansion’, i.e. easing bias without pre-commitment.

HSBC: (Wang) Expect another 25bps rate cut, in-line with prior ‘mid-cycle adjustments’. Not expecting major changes to the statement may simply say, for the third time in a row, that as the Committee “contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” Any changes to forward guidance will be left to Powell in the Press conference where HSBC suspect the Fed will transition to a wait-and-see approach – one in which the hurdle for additional rate cuts would involve a more significant-than-expected deterioration in economic conditions. HSBC expect the federal funds rate to be held unchanged in December and over the course of 2020

MS: (Hornback, Zettner) Expect a 25bps cut with assurances that it “will act as appropriate to sustain the expansion”. MS expect the Committee will continue to highlight the divergence between strong jobs and consumer spending vs. soft investment and exports. Housing activity is tracking a solid pace in 3Q19, evidence that insurance cuts are working. Some FOMC participants may point to low inflation and low inflation expectations as justification for a further rate cut, but the committee will likely remain divided on this. While MS believe post-October is an appropriate time to take a breather, Chair Powell should avoid signaling a pause lest financial conditions tighten materially. The statement and the press conference should maintain the ready-to-act-as-necessary message.

GS: (Hatzius/Phillips/Mericle/Hill) In a piece called “3 and out?”, GS said “Strong signaling from Fed leadership indicates that the modest trade war de-escalation since September has not deterred them from completing a 75bp, 1990s-style “mid-cycle adjustment””. GS expect a slightly hawkish tone, with “Powell alluding to a baseline of unchanged policy but emphasizing data-dependence and the ability to respond quickly if the outlook deteriorates”. GS suspect mixed growth data since the last meeting more closely n resembles the Committee’s baseline forecast than the downside scenarios under discussion. Accordingly, they expect only minor changes to the statement’s growth characterization, with consumption growth downgraded to “solid,” overall growth still characterized as “moderate,” and a nod to the “further decline” in the jobless rate. They expect a somewhat hawkish rewording, with “act as appropriate to sustain the expansion” replaced by a reference to recent easing and the less committal “will act as needed to promote its objectives.”

Jefferies: (McCarthy, Simons) Jefferies are an outlier view going into this meeting and think the decision to cut rates again is probably closer than the market is expecting given the recent Fed comments and recent developments. They think this meeting will involve two important decisions: 1. Whether or not to cut rates on October 30th or defer the decision until December when some of the dust has settled on the international events that prompted the Fed to cut rates in July and September. 2. Policymakers will wrestle with the communication issue of how to send a compelling signal that policy really is not on a “preset course” and that the 2019 rate cuts are indeed a “mid-cycle adjustment”, rather than a more prolonged rate cut cycle. JEF Economics base case remains that the FOMC will hold steady on October 30th but keep a December rate cut on the table. They expect refraining from an October 30th rate cut and keeping that option on the table for December will provide policymakers with the best opportunity to both break the market mindset that the FOMC is again in a race to a 0% fed funds rate and be able to continue to act “as appropriate” to sustain the US economic expansion. Delaying a rate cut until December would also provide some late-year rate relief in the event that funding pressures again begin to build ahead of year-end.

JPM: (Feroli) In the 25bp rate cut camp and believe the post-meeting statement will be a little more hawkish than the July and September statements, perhaps observing that the three cuts cumulatively have served to balance risks to the outlook. JPM believe however, the Fed will maintain “will act as appropriate to sustain the expansion,” thereby leaving the door partially open for further easing in December or later. They don’t expect any technical changes to IOER or to temporary or permanent open market operations, though these topics will likely come up in the press conference. At the press conference we expect the Chair will keep his cards close to the vest, as was the case in September but unlike July, and will offer ‘data dependence’ as the only forward guidance on rates. In the statement, JPM see two potential changes in the first paragraph pertaining to current conditions: a marking down of the recent pace of activity growth to “modest” (depending on that morning’s Q3 GDP report) and a marking down of recent survey-based measures of inflation expectations to “low.”

Natwest (Girard, Cummins) As was the case in September, economists at NWM expect the Fed to deliver a “hawkish” cut, i.e. reducing rates by 25 bps but suggesting little predisposition to act further. In Fed Chair Powell’s post meeting press conference, they expect to hear three main themes: (1) Ongoing confidence in the expansion, underscoring that the actions taken to date are still considered by most on the FOMC to be “insurance”; (2) future policy action remains “data dependent”, i.e. the FOMC will assess risks to the outlook on a meeting-by-meeting basis and will act as necessary to ensure the expansion is sustained; and (3) the recently announced decision to again grow the Fed’s balance sheet reflects reserve management and is not quantitative easing, i.e. the balance sheet is not now being used as a policy tool (though all options remain open in the future should circumstances warrant). In the end, NWM expect market expectations for future Fed action are unlikely to be meaningfully altered in the wake of the October meeting. Whether October proves to be the last rate cut for this cycle or not will ultimately be determined by the data released in the weeks and months ahead.

Scotia (Holt): Also expecting a 25bp rate cut but less convinced the Fed will signal a pause in the rate cu cycle and think there are risks the statement changes are slanted towards being more dovish. Scotia expect A noncommittal policy bias is likely to be retained. The statement is likely to repeat that the committee will “act as appropriate” in data-dependent fashion regarding dual mandate progress. The press conference is likely to reaffirm that policy is not on a preset path and that the economy is in a good place. Holt lays out six main reasons why the Fed are unlikely hint at a pause: 1) they no longer consider this a ‘mid-cycle adjustment’ as Powell has not repeated the phrase since July 31st 2) indicating on-hold policy does not square with data-dependency 3) Fed has not adequately guided in that direction as the market is still pricing 50bps of cuts by next Summer (oct inclusive) and would unduly shock markets 4) such a move would add further stress amid continued pressure on funding markets 5) still too many economic/geopolitical uncertainties to pre-commit to any specific policy course 6) doing so will hurt their chances of approaching their 2% inflation goal and further suppress inflation expectations.

TD (Misram Goldberg, Lu) Expect a 25bps rate cut with the Fed likely to communicate patience in deciding future policy moves as they assess the impact of the three cuts they have already delivered. Going forward, TD therefore expect the Fed to temporarily pause before resuming rate cuts in Q1 2020. In explaining the decision to ease further, TD think the Fed is likely to reiterate ongoing global concerns (weak growth prospects and trade uncertainty) as well as soft inflation and falling inflation expectations. The domestic economy has provided no clear signs of stabilization; the consumer has remained firm, but business investment is still subdued, and surveys have deteriorated further since the September meeting. In the statemen, they think the Fed will attempt to communicate the Fed has provided enough accommodation since July in the face of rising uncertainties to the modal outlook. At the same time, TD do not expect the Fed will fully close the door on additional easing if necessary.