So, the Fed moved to cut interest rates by 25 bps yesterday. Let's summarise the key parts of the decision and Fed chair Powell's press conference.
- The decision only saw Trump nominee Miran as the sole dissenter, voting for a 50 bps rate cut
- Bowman and Waller did not join the more dovish camp, which was a possibility
- Fed chair Powell reaffirmed that "there wasn't widespread support at all for a 50 bps rate cut today"
- Latest dot plot projection shows 10 members expecting at least two more 25 bps rate cuts this year
- Meanwhile, 9 members are expecting just one more 25 bps rate cut by year-end
- The balance is skewed by Miran, who has his 2025 dot at 2.875% - in wanting a 50 bps rate cut at every meeting
- 2026 dot plot median seen at 3.4%, 2027 dot plot median seen at 3.1% - both meeting expectations
- Fed chair Powell labels the decision as a "risk management" cut
- Adds that labour market risks were the focus of the decision, as inflation risks are "a little bit less" now
- But he also goes on to maintain that the Fed is on a data-dependent path, taking things meeting by meeting
So, what can we make of all of that by putting everything together?
In short, the Fed may yet still be on track to cut rates again in October and one more time in December. Powell said he did not give his "blessing" to the current market pricing but that doesn't mean they aren't going to take that into consideration. Market players are focusing on softer labour market conditions and that is what the Fed acknowledged yesterday.
That puts heavy focus on the next non-farm payrolls release on 3 October. If the trend continues, the Fed should be poised to cut rates again next month. But if there is some evidence of a rebound in jobs, that might yet take things off the table.
Nothing is a given but the onus is now on US data to prove markets wrong. As things stand, traders are still pricing in ~44 bps of rate cuts by year-end. The balance is skewed closer towards two 25 bps rate cuts than one more 25 bps rate cut currently.
The dot plots weren't as dovish to convince of a more aggressive easing cycle, that despite Miran's skew. Meanwhile, Bowman and Waller not hopping on the 50 bps bandwagon this week means that policymakers are still heavily contemplating existing economic conditions before really taking a bolder step.
The next FOMC meeting decision will fall on 29 October, so we'll have another month with a full slate of US economic data to digest before getting to that.
As far as yesterday's decision goes, there is a little bit of something for everyone. And that means at the end of the day, there might not be all much to work with given what markets have priced in before the decision.
The dollar is firmer for now but nothing to suggest a material turnaround in sentiment, besides a near-term pullback to the more dovish pricing in the run up to the Fed. Meanwhile, equities are still seeing dip buyers step in with conviction as the Fed communique mostly just reaffirms what is already priced in.
As mentioned above, it's more so of a case now that US data has to prove market pricing wrong. Otherwise, there's not much of a need to overreach and/or overinterpret the FOMC meeting decision this week.
