Morning from Copenhagen.

We have spent the past week thinking about the full outcome space for the FOMC meeting later today, as everything is currently smelling like a 50bps cut – why would Nick Timiraos open the door for the 50 if there weren’t any considerations from within the Fed to do so? And now that 3 senators have chosen to urge the Fed to do 75bps, the implied market moves have made it even more expensive to come through with a 25bps cut.

Our base case later today is 50bps for the reasons described above, and also given the semi-famous Kaplan-rule within the central banking space that if you start off the cutting cycle with a 50bps cut, it’s rare that you will end up regretting the decision as a central bank – if things start to sour, you did what you could – but if you do 25bps and the economy starts to fall apart, you will quickly regret not cutting the appropriate amount.

What’s particularly interesting about tonights meeting is that going back to 2008, this is the most uncertain market pricing for a Fed meeting (with the exception of 2020, which was an outlier). This means we can expect significant volatility regardless of the decision—whether it’s a 25 or 50 basis point cut or an early end to quantitative tightening (QT).

As a result, we were already seeing early signs of de-risking yesterday, and it’s likely to continue today. This includes a stronger USD, rising rates, and gold selling off ahead of the meeting.

We’re in the camp favoring a 50 basis point cut, and we will maintain a tilt towards that outcome in the portfolio leading up to the meeting. In the worst-case scenario, we anticipate the Fed may soften a 25 basis point cut with an earlier end to QT.

Chart 1: Markets are split between 25 and 50 bps