Market Mondays: central banks take centre stage, focus on the Fed

Markets are heavily priced for a 25bp Fed cut on Wednesday, with only a slim tail risk of 50bp. The real story is the guidance: the new Summary of Economic Projections (SEP), the dot plot, the vote split, and Chair Powell’s tone — all of which will shape the path into year-end. The BoE is set to hold at 4% on Thursday, likely slowing QT, while the BoJ should stand pat but could hint at a late-2025 hike.

The Federal Reserve: cut is (almost) a given — the path matters more

Futures imply a near-consensus for a 25bp reduction at the FOMC meeting this week. Several mainstream trackers put the probability of a quarter-point cut in the ~90–95% range, with only a small chance of 50bp.

That skew reflects the latest data mix: headline CPI at 2.9% y/y in August with core at 3.1%, alongside a softer labour backdrop, including large downward revisions to employment and a weak August payroll print — a combination that supports some easing but hardly screams the need for a jumbo cut.

What to watch:

• SEP & dots: Markets already discount a dovish trajectory versus the Fed’s last projections. If the new median dots show fewer cuts than priced, or a slower glide path in 2026, that’s a hawkish surprise.
• Vote split & dissents: Prior meetings saw hawkish-leaning members dissent; a split decision this week (e.g., a lone 50bp vote or a hold vote) would underline internal debate and could lift rate-path uncertainty.
• Powell’s tone: Since Jackson Hole, his messaging pivoted from tariff-watching to growth risks, but he’s kept optionality. With markets positioned for a steady easing cycle, even a neutral presser could trigger a dovish-to-neutral repricing across curves and equities.

Furthermore, the meeting lands amid a very public fight over Fed independence, including President Trump’s attempt to remove Governor Lisa Cook and a fast-tracked push to seat Stephen Miran. Separately, the White House is vetting candidates for Powell’s successor once his chair term ends May next year. Markets won’t trade the politics tick-for-tick, but a perception of a more dovish future leadership can colour rate-path expectations beyond Powell’s horizon.

Market set-up: Positioning feels relaxed into the event — equities near highs and a lot of easing priced. If the dots and presser simply fail to validate that dovishness, a hawkish-neutral surprise (fewer 2025 cuts, higher long-run dot, or a tighter vote) is the most obvious risk to watch.

S&P 500 daily chart

Past performance is not a reliable indicator of future results.

Bank of England: steady at 4%, eyes on QT pace and data

The MPC is widely expected to hold Bank Rate at 4.00% on Thursday. The bigger story is balance-sheet policy: recent commentary and polling point to a slower pace of active gilt sales (QT) given market sensitivity and the rise in long-dated yields.

The growth-inflation mix argues for caution. July GDP was flat m/m and the three-month growth rate slowed to 0.2%, while headline CPI sits around 3.8% and could rebound near-term — still well above target and keeping services inflation sticky. That combo supports “hold now, talk about QT tweaks,” with November left open for debate.

What to watch out for: A slower QT run-rate would reduce the mechanical supply of duration into a fragile gilt market, easing some pressure on term premia. Guidance on QT mechanics (e.g., skewing away from long-dated sales) will be read closely by rates and GBP traders

Bank of Japan: no change… but the “next hike when?” debate heats up

The BoJ is expected to stand pat this week, with the policy statement typically hitting late morning Tokyo time. But economists increasingly see scope for a Q4 rate increase as the Bank nudges further away from ultra-easy policy and discusses balance-sheet normalisation (including ETFs).

Key focus: A mildly hawkish tweak (upgrading inflation/wage risks or firming guidance) would support JPY and weigh on the Nikkei; a status-quo message keeps the yen range-bound and global yields anchored.

Bottom line

• Baseline: Fed -25bp with a message that keeps optionality but tries not to over-validate the market’s dovish glide path.
• Risk skew: Given how much easing is priced, the cleanest surprise is hawkish-neutral — fewer cuts pencilled in, a tighter vote, and a press conference that leans “data-dependent” rather than “pre-committed.”
• Elsewhere: BoE to hold and likely soften QT pace; BoJ to hold but keep Q4 hike talk alive. Together, that mix argues for range-bound USD, gilt outperformance if QT slows, and JPY sensitivity to any hawkish nuance from Tokyo.