On Thursday, the Federal Reserve will announce its interest rate decision and cut rates for the first time in four years. Prior to this, the central bank has maintained borrowing costs at a high level in the past year.

However, as far as this meeting is concerned, it is worth noting that typically, although there may be a lot of speculation in the market, the Fed's interest rate meetings are usually fairly predictable. Policymakers often communicate their intentions in advance so that the market can react ahead of time and everyone has a general understanding of what is going to happen. But now, the market is still uncertain about the extent of the Fed's interest rate cut.

Forecasters generally expect the FOMC to cut rates by 25 basis points, bringing the federal funds rate to a range of 5% to 5.25%. However, economists at JPMorgan expect the Fed to take a "proactive first step" by reducing rates by 50 basis points, and investors also believe there is a greater possibility of a 50 basis point rate cut.

In addition to the interest rate decision, the Fed will also release its latest quarterly forecast, which will provide more insights into borrowing costs and the future direction of the economy.

Investors generally believe that the Fed's pace of rate cuts this year will be more aggressive than the series of 25 basis point cuts expected by economists. Financial markets have already priced in a rate cut of over 1 percentage point by the Fed for the rest of this year, which means the Fed will cut rates by at least 50 basis points at one meeting.

Half an hour after the interest rate decision, Fed Chairman Powell will hold a press conference, during which he may have to strike a balance between his own views, the views of the committee, and the information conveyed by the so-called "dot plot". If there are different statements, it could lead to significant market volatility.

"I hope they will cut rates by 50 basis points, but I doubt they will only cut by 25 basis points. My hope is 50 basis points because I think the rates are too high," said Mark Zandi, Chief Economist at Moody's Analytics. "They have accomplished the task of full employment and inflation returning to target, but this is inconsistent with the current federal funds rate. So I think they need to normalize rates quickly, and there is ample room to do that."

There is a fierce debate about the rate cut.

In recent weeks, the derivatives market pricing around the magnitude of the Fed rate cut has been unstable.

It was not until last week's CPI data was released that traders locked in a 25 basis point rate cut. However, by last Friday, market sentiment suddenly shifted, with bets on a 50 basis point rate cut taking the lead. As of Wednesday, federal funds futures traders estimated a 63% likelihood of a larger rate cut.

However, many on Wall Street continue to predict that the Fed's first move will be more cautious.

Jefferies Financial's U.S. economist Tom Simons said, "Although tightening policy seems effective, it does not work entirely as they imagine, so loose policy should be seen as equally uncertain. Therefore, if you are unsure, you should not rush."

However, Zandi believes, "They should take action quickly here, otherwise there is a risk of damaging things."

Since the last rate hike in July 2023, the FOMC has kept the benchmark federal funds rate in the range of 5.25%-5.5%. This is the highest level in 23 years, despite the Fed's preferred inflation indicator dropping from 3.3% to 2.5%, and the unemployment rate rising from 3.5% to 4.2%, this number has remained at this level.

Compared to the debates in the market, debates within the FOMC should be more interesting, with officials who usually vote consensually possibly revealing unusual divisions at this meeting.

"My guess is that there are disagreements among them," said former Dallas Fed Chairman Kaplan on Tuesday. "There will be some people at the table who, like me, feel they are a little late, they want to take the first step, and do not want to spend time chasing the economy. From a risk management perspective, there are also some people who just want to be more cautious."

Seema Shah, Chief Global Strategist at Jefferies Financial, said, "For the Federal Reserve, ultimately it's about deciding which risk is greater - if they cut rates by 50 basis points, it will reignite inflationary pressures; if they only cut rates by 25 basis points, they will face the threat of an economic recession. The Federal Reserve has been criticized for being too slow in responding to the inflation crisis, so they may take a cautious approach to the risk of economic recession, rather than a proactive one."

Change in wording

For policy statements, there may be various changes in wording, including language regarding the balance of risks between employment and inflation.

The July statement stated that these risks "continue to be more balanced," which is inconsistent with recent comments from Powell and Fed Governor Lael Brainard. They suggest that the FOMC can use language similar to what Brainard said on September 6th: "The balance of risks has now shifted to the side of the employment part of our dual mandate."

The committee may also choose to describe further weakness in the labor market as "unwelcome," a term from the Greenspan era that Powell recently used in a speech.

There is disagreement among economists over whether and how policymakers signal future rate cuts through their statements. Among the economists surveyed by Bloomberg News, 44% said officials would acknowledge the possibility of further adjustments in the document, while 31% said they would be more explicit in indicating their intention to take a series of rate cuts and provide guidance on the pace.

Goldman Sachs expects that the FOMC "may amend its statement to express greater confidence in inflation, describe the risks of inflation and employment in a more balanced manner, and re-emphasize its commitment to maximum employment."

"Dot plot" and economic forecasts

The Federal Reserve releases quarterly economic projections, known as the Summary of Economic Projections, which includes policymakers' individual forecasts for the federal funds rate, unemployment rate, economic growth, and inflation. This week's release will include projections for the years 2024 to 2027.

The projections are likely to include various views on interest rate trends for this year. At the July FOMC meeting, some participants believed that a rate cut was justified due to rising unemployment and slowing inflation. Since then, the labor market has further weakened. On the other hand, the core consumer price index, which excludes food and energy, unexpectedly increased in August, providing a reason for caution.

While the median of the "dot plot" may indicate three 25-basis-point rate cuts this year, there may be officials who believe that the Fed should lower rates more quickly.

"There are some who think there should be a 50-basis-point cut this time, or a 50-basis-point cut later this year," said LH Meyer, economist at Monetary Policy Analysis. "The economy is slowing down faster than they expected."

The economic projections for this year will also be revised. The unemployment rate has already exceeded the Fed's June forecast of 4%, and the preferred inflation measure (2.5%) has fallen below the committee's recent median forecast.

"What will "Powell the damage-maker" say?"

In addition to the above points, Powell's press conference is also worth noting as investors will get insights into the Fed Chair's thoughts. Fed watchers believe that the Chair is more concerned about the recent weakness in the labor market than the committee's median voter.

Powell is growing more confident that the Fed can restrain inflation without causing much damage to the economy and employment. A rise in the unemployment rate now would bring significant political and economic costs, something any central bank chief would want to avoid.

If officials ultimately decide to cut rates by 25 basis points, Powell has the ability to send a signal that he intends to prevent further deterioration of the labor market. Ellen Meade, research professor at Duke University and former senior adviser for policy and communication at the Federal Reserve Board, said, "The message Powell will convey is that we want to have additional ammunition, but we won't use it today."

"I don't think they will be particularly specific with any type of forward guidance," said Simon of Jefferies Financial. "When the Fed actually doesn't know what they're going to do, forward guidance at this stage of the cycle is almost useless."

It is worth noting that if Powell signals, as expected, that the fight against inflation is coming to an end and that rate cuts are on the horizon, he will face intense partisan attacks this week.

Will gold be difficult to boost tonight? Holding this position will still leave the future wide open.

Currently, gold has already responded significantly to expectations of a substantial rate cut by the Federal Reserve and has repeatedly hit record highs. Many major banks have also raised their target prices for gold, with target prices for next year ranging from $2,700 to $2,900.

Some analysts point out that if the Fed cuts rates by 25 or 50 basis points in September, the impact on gold prices may be relatively limited. The price trend of gold after the first rate cut will depend on the fundamentals of the U.S. economy and the subsequent policies implemented by the Fed. If the post-rate cut economy performs a "soft landing" as expected, it may not be conducive to the sustained rise in gold prices. Conversely, if the rate cut fails to prevent an "hard landing" of the economy, the Fed may increase the intensity of rate cuts to boost market confidence, which will provide support for the upward movement of gold prices.

Goldman Sachs predicts that if the Fed cuts rates by 25 basis points this week, gold may experience a slight pullback in the short term, but it will then reach new record highs driven by inflows into gold ETFs. Goldman Sachs analysts Lina Thomas and Daan Struyven stated in a report, "Fed rate cuts will drive Western capital back into gold ETFs, a factor that has been largely absent during the gold rally of the past two years."

They reiterated Goldman Sachs' forecast that gold prices will rise to $2,700 per ounce in early next year. Goldman Sachs economists expect the Fed to cut rates by 25 basis points on Wednesday. Under this basic forecast scenario, gold prices may experience some tactical retracement, but it is expected that as the Fed enters a loosening cycle, gold ETFs will attract gradually increasing capital inflows, thereby driving up gold prices.

From a technical perspective, FXStreet analysts pointed out that gold buyers have regained control, and the 14-day relative strength index (RSI) has fallen back from near the overbought area, still comfortably above the 50 level. As long as the bulls hold the symmetrical triangle target from a month and a half ago, at $2560, the optimistic sentiment will prevail. The current direct resistance for the bulls is at the historical high of $2590. If this is broken, the next resistance to watch out for is the $2600 integer level, followed by the psychological level of $2650.

If the dovish stance of the Federal Reserve disappoints, gold prices may face a new round of selling, possibly testing the high of August 20 at $2532. If this level is breached, gold may further decline to $2522, which is the 21-day simple moving average, followed by the psychological level of $2500.

Will the Federal Reserve cut interest rates as expected by the market in this meeting? What impact will it have on the stock market? Welcome mooer to make an appointment to watch the September FOMC interest rate meeting~

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