Quite the turnaround. Stocks rallied then fell, the yen surged then dumped as the dollar index fell below 100 for the first time since July 2023 before rebounding, bond yields and gold whipsawed and ended flat. The market took what it wanted from the Fed’s first interest rate cut in four years and made up its own mind about what is to come amid the jumbo cut — and the mumbo jumbo that followed.
The Fed cut rates by 50 basis points (bps), which was the jumbo cut the market had been looking for. The Fed appeared to be leaning more on the jobs side of the dual mandate, opening with a big move and implying another 50bps this year.
It suggests that they are seeing signs the unemployment rate could accelerate higher in the coming months — the implied rate for December dropped by 15bps.
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And yet, the Fed’s dot plot showed just another 50bps of cuts this year. The market initially felt 50bps today means the Fed is locked into doing 50bps again and again as the jobs market deteriorates. Powell said: “I do not think that anyone should look at this and say, ‘Oh, this is the new pace.’” The risk reverse ferret indicates the market listened to what Powell had to say, as well as the dots.
Powell managed to say that the reason for a big cut is to lock in the gains rather than it being a sign of things to come.
“The US economy is in a good place and our decision today is designed to keep it there… We do not think we are behind [in cutting rates], but you can take this as a sign of our commitment to not get behind,” he said.
Needless to Trump had something to say: “I guess it shows the economy is very bad to cut it by that much, assuming that they are not just playing politics.”
The Summary of Economic Projections (SEP) contained some changes from June. Inflation expectations trimmed to 2.3% from 2.6% in June, and down to 2.1% vs 2.3% in 2025. Unemployment revised up to 4.4% from 4.0% this year and up to 4.4% from 4.2% in 2025. And most interesting of all, the Fed funds rate next year is seen at 3.4%, down from 4.1% forecast in June, with the long-run rate seen at 2.9%, down from 3.1% from June.
The S&P 500 index made a record high after the announcement but finished the day lower for the session after the press conference with Jay Powell. Futures have turned higher though with a rebound overnight in Asia and into the European session with the FTSE 100 +0.9%, DAX + 0.75%, and the CAC +1.3%.
The Bank of England is likely to leave rates unchanged today and Andrew Bailey could push back against the market betting on a faster pace of cuts. Sterling trades a little firmer this morning with GBPUSD north of 1.3250 having briefly surged to a fresh two-and-a-half-year high last night on the initial sell-the-dollar kneejerk to the 50bps move.
The volatility in FX was marked – the yen surged then dropped abruptly. The Bank of Japan begun its two-day policy meeting today, expected to leave rates on hold.
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