This week’s main event will take place today when the US Federal Reserve decides between cutting its benchmark interest rates by 25bp or 50bp. Pricing in the Fed funds future and overnight interest rate swaps point to significant uncertainty in the market, although investors appear to be leaning slightly towards a larger 50bp move. Either way, the Fed is going to disappoint many who have positioned incorrectly, meaning a big and volatile market reaction is almost certain today. However, in the greater scheme of things, it matters little whether the Fed kickstarts its monetary easing cycle with a 25bp or a 50bp move, as aggressive rate cuts lie ahead either way. If it decides to cut by 25bp today, that simply means that it will need to cut by 50bp at some point in the near future as it aims to bring rates down towards neutral levels in the coming quarters to avoid a hard landing, or potentially even a soft landing.
What the Fed decides today will, however, have implications for prospective SARB policymaking. A bigger 50bp move by the Fed would encourage the SARB to reduce rates and reconsider the pace and magnitude of easing. Just as important for the SARB will be inflation and retail demand dynamics, which will be reflected in CPI and retail sales data for August and July, respectively, later today. Consensus expectations are for both releases to point to easing inflationary pressures, which would cement a widely-expected SARB rate cut at tomorrow’s policy update.