Fed Day Looms With Questions Over Size Of Cut

Key Takeaways

• Fed's Rate Decision Drives Uncertainty, Half-Point Cut Likely Expected
• Discount Stores Expansion Signals Potential Economic Downside Amid Fed Meeting
• Investors Watch VIX For Clues On Fed's Economic Outlook

Despite intraday swings, stocks closed largely unchanged on Tuesday. That shouldn't come as too big of a surprise in light of today's impending decision on interest rates. The S&P 500 and Dow Jones Industrial Average both made new intraday highs before closing flat for the day. The Nasdaq Composite edged higher by 0.2%, while the Russell 2000 closed up 0.8%.

The Federal Reserve Open Market Committee (FOMC) will make an announcement today at 1PM CT. What's most interesting about this meeting is the uncertainty regarding the size of the cut. According to the CME Fed Watch Tool, odds of a half-point rate cut have increased to 65%. The reason I find this interesting is the economic data we've received, while slowing in many cases, doesn't seem to be crashing lower. In fact, just last week, both the Consumer Price Index (CPI) and Producer Price Index (PPI) posted month-over-month numbers that came in slightly better than expected. I have been of the opinion, based on that and the prior small moves made by the FOMC, that today's cut will be just a quarter-point. However, markets are suggesting my opinion is in the minority.

If we do in fact see a cut of half a point, I think it could potentially signal the Fed is anticipating more economic downside risk. Therefore, I think one metric investors may want to keep their eye on is the VIX. On Tuesday, VIX closed at 17.61, slightly above its historical average of around 16.

Another interesting story and tangentially related to today's Fed cut decision is an article in The Wall Street Journal regarding Dollar General and Dollar Tree. According to the article, the two chains are on pace to open a combined 1,300 new stores this year. While the number is down from last year, it comes despite slowing sales and weaker earnings. However, both stores perform well during periods of economic tumult and the expansion plans may suggest both stores are expecting an economic slowdown.

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While it is only two potential data points, the expansion of discount stores and expectations for a half-point rate cut could be considered as possible warning signs. I am not overly concerned at this point; however, I do believe this will put greater emphasis on the upcoming earnings season which kicks off in just a few weeks. While the past several earnings seasons have largely focused on Artificial Intelligence (AI), I think that narrative may change some to include consumer spending and things such as credit card balances. JP Morgan will report earnings on October 11th, and I think the commentary Jamie Dimon provides during their earnings call will become heavily scrutinized with respect to the health of consumers.

For today, markets are largely waiting on the Fed decision and post announcement press conference by Jerome Powell. I expect trading volume to be light ahead of the announcement, though that does not mean there isn't potential for some choppy trading. Then, after the announcement, I expect volume to pick up. I also would not be surprised if we get a large directional move right after the announcement and another large directional move following the press conference. In other words, the last couple hours of the trading day could prove volatile. As always, I would stick with your investing plan and long-term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.