The stock market is about to set a new record if the Federal Reserve book

The Federal Reserve is expected to cut interest rates by a quarter point on Wednesday, but what it says about its future plans will determine whether stocks will continue to perform at record highs.

The tensions around this month's meeting rate decision are high. Fed Chairman Jerome Powell faces dissent within the Fed's board of directors from some members who do not believe that the economy is weak enough to warrant a rate cut. Two members objected to the last rate cut and even more could oppose it.

The Fed is also under pressure from the financial markets, which pitted a crisis earlier this summer, fearing that it will take too long to avoid a recession. On top of that, the Fed faces an unprecedented level of criticism from the White House, with President Donald Trump repeatedly criticizing the Fed's board of directors and Powell, himself, for not having enough reduced interest rates. This week, the president went as far as calling Fed officials "heads" and asked them to bring the federal funds rate to zero or even a negative level.

In this context, the stock market is flirting with new highs, as the Fed joins other central banks to soften its policy in the face of the global economic slowdown. Stocks were higher for the week and Friday, trading less than 1% from the July highs of the Dow and S & P 500 indexes. The Dow closed the week up 1.6% at 27,219, while the S & P 500 index was up about 1% at 3,007., 21 points from its historic high.

Signs that trade negotiations between the United States and China could progress in the market were boosted, with each party suspending the adoption of new tariffs, ahead of the official October negotiations.

"This is good news for the markets this week. Trade tensions are easing. You further relax the central bank's measures and you have Goldilocks' economic data. Investors are delighted … and that's why you have markets that are very slightly below all. on time, "said Michael Arone, chief investment strategist at State Street Global Advisors.

The Fed may disappoint markets if it does not explicitly promise more easing. The Fed could do this in the quarterly projection of interest rate forecasts, which will be released with its economic projections after the meeting. Fed officials include growth and inflation forecasts, in addition to interest rates, which appear in a chart called "point graph".

"The question is whether the Fed will show its willingness to continue lowering its rates, or will it suggest that this mid-cycle adjustment is coming to an end." My point is that they are not going to not give in to a stalemate, and they will give themselves plenty of room to cut again at some point, "said Arone. "This will be the biggest risk at the moment.The markets are planning a number of rate cuts over the next few quarters and will the Fed take this into account? This will be a sticking point."

Last week's US data was much better than expected as retail sales rose 0.4% in August, continuing a more sustained trend, thanks to improved auto sales. However, the Fed's dilemma could be that inflation in both production and consumption accelerated in August, with the core CPI reaching 2.4%, its highest growth rate since 2008, which is significantly higher than the Fed's 2% target. , but the Fed prefers to look at PCE inflation, which is around 1.6%.

The calendar for the coming week is set for Monday by the Empire State Manufacturing; industrial production Tuesday; Wednesday starts and existing home sales and the Philadelphia Fed survey on Thursday. But it's the Fed that will resonate more with the markets.

"We think they're going to cut 25 [basis points]. We think half of the committee members looking for a further cut and others looking for unseen solutions will be split, "said Kevin Cummins, lead economist at NatWest Markets. quarter point the target range of federal funds interest rates., between 2.00 and 2.25% in July.

Some strategists have said that the more dissent there is, the more it would increase market volatility, as the Fed's outlook becomes much more uncertain if Fed officials do not support policy actions more evenly.

Cummins said he expected the Fed's statement after the meeting reflects a slightly more moderate economic activity in July, and that it will likely mention that the job market could be "solid" instead of "strong" and that job gains have moderated.

"That leaves the door open for more [rate cuts]. The dot chart shows another reduction by the end of the year. You could argue that they will stop in October if things remain unchanged, "he said, adding that they could also resume in December.

The Fed is facing much brighter markets than it would have been in August, when trade tensions intensified as Trump's tweet threatened to raise tariffs on China. Shares rose as bond yields approached lows in August, and traders are now expecting a 25 basis point cut this week, one more for this year and another next year. .

While Treasury yields had fallen to a record high and multi-year lows in August, the futures market was standardizing up to three more Fed rate cuts in a year. Since then, the 10-year return, which is moving in the opposite direction, rebounded to 1.90%, more than 45 basis points from its low point.

The change of more than 30 basis points in the 10-year return over the past week is the largest weekly change since November 2016.

Trade developments could also change markets in the coming week, just as they did last week. Analysts say the market is the most vulnerable in the event of a negative surprise. Trump's trade tweet on August 1, threatening new tariffs on China, has created a new wave of market turbulence.

"It's a bit ironic: without the trade conflict with China, the Fed would not reduce rates at all, and yet President Trump continues to force them to lower rates," said Arone.

Mr. Arone said that trade negotiations are in fact the main determining factor for the market. He also said the markets may be overly optimistic about the expectations of the trade deal.

"There is a kind of inherent risk to the markets if, in fact, tensions rise again," he said.

On Monday

8:30 am Manufacturing of the Empire State

Tuesday

Fed begins its two-day meeting

08:30: Survey of business leaders

9:15 Industrial production

9:15 am Using capacity

NAHB survey at 10:00

16:00. ICT data

Wednesday

8:30 am Housing starts

2:00 p.m.. Fed decision

2:30 pm in the afternoon. Press conference Fed & # 39; s Powell

Thursday

8:30 am The first complaints

8:30 am Philadelphia Manufacturing Inquiry

8:30 am Current account

10:00 am Sale of existing homes

10 am Advanced index

Friday

11:20 Eric Rosengren, President of the Boston Fed, at the Stern School of Business Conference

2:00 p.m.. Dallas Fed President Robert Kaplan at the Federal Reserve Bank Community Forum