FOMC Preview: Let’s get on with it

The Federal Open Market Committee (FOMC) will likely decrease its main policy rate by 25bps to an upper bound of 4.25% in its September meeting . We think the communication from Chair Powell and the official statement will acknowledge the softness in the labor as well as the uncertainty about the effects of tariffs on inflation but assert that the upward pressure on prices should be viewed as transitory. Still, we think the path towards neutral may not be a direct one. With inflation still above target and trending in the wrong direction, Fed communication will want to be restrained about how quickly policy rates will fall, only suggesting that a re-calibration over time will be appropriate. From a US rates perspective, we work through expected market reaction to our base case as well as potential dovish and hawkish scenarios. As we see a higher probability of a dovish surprise than a bearish one, we hold our prior front-end long and curve steepener recommendations.