Synopsis:

BofA expects the Fed to cut the fed funds target by 25bp to 4.25-4.5% at its December meeting, followed by a likely pause in January, as suggested by the expected communication from the Summary of Economic Projections (SEP) and Chair Powell's remarks.

Key Points:

• Policy Expectations:

  • Fed likely to announce a 25bp rate cut, fully priced by markets.
  • Chair Powell’s guidance expected to signal a slower pace of cuts and a likely pause in January if inflation data remain sticky.

• Rates and FX Implications:

  • Hawkish undertones could emerge if Powell highlights insufficient inflation progress.
  • Potential for a reduction in the ON RRP rate, though conviction on this is low.
  • No new QT announcements anticipated, but additional forward guidance could be provided.

Conclusion:

BofA sees the December FOMC meeting as pivotal for setting expectations into 2025. While no major surprises are expected, any hawkish signals could trigger FX market volatility, particularly benefiting the USD if rate cut expectations are tempered.