Markets Holding Ahead of Fed Rate Decision

US equities took a breather after rising ahead of the FOMC's rate decision later this week, as investors are mostly (but not wholly) sure that there will be a 25-bps rate cut.

The Key Events

• Markets are pricing in a 90% chance of a rate cut, with a pause at the January meeting, which could lead to substantial volatility.
• Inflation is above target, but expectations are that the FOMC will focus on the weaker jobs market to justify a cut, which would be reflected in the rhetoric, with expectations of easing continuing next year.
• Markets are in a holding pattern ahead of the meeting, with focus on the 2026 outlook as the Fed is set to update its dot-plot matrix.

Fed to Cut and then Hold?

After some uncertainty in November, markets are pricing in a 90% chance that the Fed will cut rates at the upcoming meeting on Wednesday. This aligns with a strong, though non-unanimous, consensus among economists. However, markets are also expecting the Fed to pause at the next meeting. This creates some uncertainty that could push markets regardless of the outcome, along with substantial volatility if the outlook isn't as expected. To make predicting more challenging, the Fed is heading into the meeting without a full slate of official data releases, making it harder for analysts to parse expectations. Not only is there a monetary policy decision, but the Fed will also update its dot-plot matrix for next year. Traders will also be keenly listening to Chair Jerome Powell, who surprised markets last time with a more hawkish-than-expected message. The market is also seeking clarity on the recent divergence of opinions at the Fed, with the number of dissenting voters also coming into focus.

The deciding factor will be the ongoing debate over whether the Fed should prioritise the sluggish labour market or address inflation that remains above target. The consensus is that there is a focus on the jobs market, with ADP reporting 35K jobs lost last month just ahead of the November NFP next week. But the Fed can't ignore inflation forever, so traders will also be looking to see if there is a growing number of dissenters voting to hold. At the last meeting, the vote was an ultra-rare three-way split: the majority favoured a 25bps cut, one favoured a 50bps cut, and one favoured a hold. The market could also be disconcerted by a rising number of "rebels" on the FOMC, signalling that Powell is having difficulty corralling policy opinions, as his mandate is close to running out, and US President Donald Trump has reportedly already chosen his successor. In that context, Powell's hawkish tone might carry less weight with markets.

Pivotal Moment for Stocks

US equities are nearing all-time highs ahead of the meeting, driven by the AI-fuelled tech boom that has left many major stocks with stretched valuations. Lower rates are expected to help growth stocks, which are likely to have the greatest impact on the tech-heavy Nasdaq. Traders will likely be closely watching the dot-plot matrix to better understand how much easing to expect from the Fed next year. The last version of the matrix, published in September, showed two additional rate cuts in 2026 (assuming a December cut). The market is pricing around double that. If the dot-plot matrix fails to meet the market, it could be seen as hawkish and hurt stocks, particularly high-beta tech stocks. With all the recent dovish news, the market might have gotten a little too enthusiastic about the prospect of easing. On the other hand, a dovish Powell statement after a rate cut could spark a relief rally in markets.

Nasdaq Awaits Post-FOMC Signals

At current levels, Nasdaq could break above its record peak of 26250 if the upper Bollinger Band at 25860 and the 26k handle give way to bulls but could initially form a double top. With that price action in mind, the lower band at 25180, alongside the 25k barrier, will play a critical role in whether bulls can sustain upside bias. If there is no dovish interpretation in the immediate aftermath of the FOMC, Nasdaq might even fail to surpass the local band and break down below the median support of 25520 faster. In this more bearish case, the focus below 25k might turn on 24k, as the major trendline support connecting 23k and 24k may trigger a market correction.

Source: SpreadEx | US Tech 100, Daily Chart