Both U.S. Indices and Treasuries ended Wednesday with gains, while the Dollar was sold after a surprisingly dovish FOMC and Powell press conference (summary below). Briefly recapping, the Fed cut rates by 25bps to 3.5-3.75%, as expected, but in a dovish 9-3 vote split – Goolsbee and Schmid voted to leave rates unchanged, while Miran wanted a larger 50 basis points reduction. Heading into the meeting, as many as 4 hawkish dissenters were touted. In the following press conference, Powell largely put more emphasis on the labour side of the mandate vs inflation, but he did acknowledge that rates are in a plausible range of neutral. Looking to January, he noted the Fed has not made a decision yet, they will wait and see how the data comes in, stressing there is a lot of data due to come. As a reminder, next week, we will see the October and November NFP, the November Unemployment rate, and the November CPI. On account of the aforementioned broad Dollar weakness, all G10 FX peers profited, with the Canadian Dollar ultimately firmer following the Bank of Canada’s decision to hold rates at 2.25% in an expected decision, reiterating that the current rate is about the right level to keep inflation close to 2% as long as the economy and inflation evolve in line with projections. Oil saw slight gains but had seen initial weakness in the wake of Kazakhstan announcing it is to raise oil exports via alternative routes to the CPC routes. However, upside ensued on reports, that were later confirmed, that the US seized an oil tanker off the coast of Venezuela. Precious metals moved higher in response to the dovish Fed. Elsewhere, sectors were almost exclusively in the green, aside from Utilities, with Industrials the outperformer and buoyed by a stellar GE Vernova update. Fed cuts rates, and vote split triggered a dovish market reaction. The FOMC cut rates by 25bps to 3.50–3.75% as expected, with a 9–3 vote split; Miran sought a 50bps cut, while Goolsbee and Schmid preferred no change. It reiterated data dependence, signalling that further adjustments will hinge on the evolving outlook, labour market conditions, inflation dynamics, expectations, and global and financial developments. Policy guidance was tweaked, changing the phrase “in considering additional adjustments” to “in considering the extent and timing of additional adjustments.” In its updated SEP, the Fed Funds projections are essentially unchanged, signalling steady expectations for a gradual return toward the longer-run rate. However, the 2025 dot plot composition shows six members projecting end-2025 rates at 3.75–4.00%, indicating that four non-voters would have voted to keep rates on hold at today’s meeting if they had voting rights. The Fed noted slower job gains and a slight rise in unemployment through September, with the December statement updating October’s labour-market phrasing by replacing “the unemployment rate has edged up but remained low through August” with “the unemployment rate has edged up through September.” Unemployment forecasts are only marginally firmer in the out-years, suggesting a slightly more resilient labour market. Inflation has increased since earlier in the year and remains somewhat elevated, while core PCE expectations have eased modestly, pointing to a marginally softer inflation path and slightly more confidence in disinflation over the forecast horizon. Economic activity is described as expanding at a moderate pace, with uncertainty around the outlook still high and downside risks to employment having risen recently. The Fed said reserve balances have declined to ample levels and will use shorter-term Treasury purchases when needed to maintain sufficient reserves. October’s balance-sheet guidance, “the Committee decided to conclude the reduction of its aggregate securities holdings on December 1,” is removed; instead, December adds: “the Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves.” Overall, it was a net dovish press conference from Powell, particularly compared to the tone of the October press conference. Powell appeared more concerned about the labour market side of the mandate than inflation. Powell stressed several times that there are downside risks to employment; while saying it is a reasonable base case that the tariff effects on inflation will be one-time. He was optimistic on growth too, noting the baseline outlook would be solid growth next year as fiscal policy will be supportive, consumer continues to spend, and AI spending continues. When asked about why they cut today after a hawkish October press conference, he said there has been a gradual cooling in the labour market, and they think there is -20k payrolls per month, while inflation has come in a touch lower. He also suggested the overcount of payrolls is around 60k per month, while labour supply has come down sharply. He said it does not feel like a hot economy, and evidence is growing that services inflation has come down, and goods inflation is entirely due to tariffs. Some hawkishness was seen as Powell said they are well-positioned to determine adjustments to the policy rate, noting that rates are now in a plausible range of neutral, later describing policy rates as in the high end of neutral. He was quizzed about the guidance, noting that the “extent and timing” phrase points out that they will carefully evaluate incoming data. He also said the Fed is well-positioned to wait and see how the economy evolves, but they will see a great deal of data before January, so they have not made up their mind yet. He also said that with rates in a plausible range of neutral, the base case is still not for rate hikes. Elsewhere, both Oil and Gold closed higher by 0.5% and 0.6% respectively.
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