Fed decision ‘too close to call’ says Evercore

The Federal Reserve’s upcoming rate decision on September 18 is “too close to call,” with the market split almost evenly between a 25 or 50 basis point cut, according to Evercore ISI strategists.

This uncertainty has created a “coin flip” scenario, with the potential for heightened market volatility regardless of the outcome. Evercore warns that both stock and currency markets could react sharply to the decision.

The uncertainty mirrors the current U.S. political climate, with Evercore drawing comparisons to the 2000 U.S. election and its “Hanging Chads” situation, where results remained unclear for weeks. Back then, the Fed “was slow to cut rates,” the investment bank notes, leading to a recession.

In contrast to 2000, the central bank must be cautious not to delay critical decisions in the face of uncertainty, Evercore adds.

Strategists believe a 50 basis point cut could cause the yen to strengthen, potentially driving the USD/JPY below the critical 140 level, which would pressure U.S. stocks. On the other hand, a 25 basis point cut might have the “opposite effect,” they added.

The spotlight quickly shifts from September 18 to the November 7 FOMC meeting, which will take place just two days after the U.S. presidential election. Evercore warns that there is a chance the election outcome will not be immediately clear, drawing comparisons to the 2000 election.

The Fed, therefore, needs to signal its readiness for a “Jumbo” cut on November 7, potentially at least 25 basis points larger than the September cut, if political uncertainty and economic softness continue, according to Evercore.

As the market awaits the interest rate decision, Evercore’s team continues to predict that the S&P 500 could still hit 6,000 by year-end, despite the near-term volatility.

The firm’s long-term outlook remains focused on earnings growth, which it believes will be rewarded by the market once uncertainty subsides. As such, strategists raised their 2024 S&P 500 earnings per share (EPS) estimates to $240 from $238, and 2025 estimates to $257 from $251.