Two-way action was seen following the FOMC, SEPs and Chair Powell’s press conference. A dovish reaction was seen after the Fed cut rates by 25bps, as expected, which was accompanied by dovish SEPs, as 50bps of further rate reduction is now seen in 2025, against the prior, and expected, 25bps of additional cuts. Do note, it was a tight call as 10/19 saw 50bps (or more) of cuts, while the other 9 saw 25bps (or less). The Fed also adjusted its guidance to signal a clearer path of easing ahead. In reaction, the Dollar was sold while Equities and Treasuries saw upside; however, the moves had started to pare as participants awaited the Powell presser. In the press conference, he was notably more hawkish than the statement and SEPs implied, which saw these moves reversed. The Fed Chair said he does not feel the need to move quickly on rates, and that you could think of Wednesday’s cut as a risk management cut, and that decisions will be taken on a meeting-by-meeting approach. Elsewhere, the crude complex was choppy, but settled lower in thin newsflow despite bullish weekly EIA data. Sectors were mixed, as Financials and Consumer Staples sit atop of the pile, while Technology lagged and was weighed on by NVIDIA (-2.6%) weakness after China shunned NVDA chips from Chinese tech companies. As mentioned, the Dollar eventually gained to the detriment to G10 FX peers in the wake of Powell, with the Canadian Dollar little moved on the Bank of Canada earlier in the day. For the record, spot Gold hit another all-time-high above USD 3.7k/oz in the wake of the FOMC statement but fell back beneath the level as Powell spoke. The Fed cut rates by 25bps to 4.00-4.25%, citing a shift in risk balance. Bowman and Waller joined consensus, calling for a 25bps reduction; new Governor Miran dissented, preferring a 50bps cut. Nine of 19 officials see two additional cuts in 2025, two see one cut, six see no more reductions. Adjusts guidance to state that “in considering additional adjustments to the target range for the federal funds rate…” from “in considering the extent and timing of additional adjustments”. In its statement, it also tweaked its labour market view, downgrading language (no longer ‘solid’, unemployment has edged up but ‘remains low’ and adds that ‘job gains have slowed’). This years unemployment rate forecast, PCE and core PCE were unchanged; for next year, unemployment was revised lower, PCE and core PCE were raised (the statement notes that inflation has moved up and remains ‘elevated’). In his press conference Fed Chair Powell was more hawkish than the statement and dot plots implied. He reiterated the usual SEP language that this is not a set path of rates. He also mentioned the close split on the dot plot for this year (10 see two or more rate cuts, 9 see fewer than that), and to look at projections through the lens of probabilities. The Fed Chair also exclaimed that the Fed does not feel the need to move quickly on rates, and that you could think of yesterday’s cut as a risk management cut. He also said that he does not think a quarter-point cut will have a great impact, and also said there was no widespread support for a 50bps rate cut. Looking ahead, he did not want to commit to a policy path but said decisions will be made on a meeting-by-meeting basis, and they will be looking at the data. He highlighted that downside risks to the labour market have increased, while he noted that he sees inflation rising this year as goods prices rise from tariffs, but reiterated that he expects it to be a one-time rise. It is clear that the labour market concerns are the priority at the moment. Powell spoke several times of the downside risks to employment and noted it is the risks to the labour market that were the focus of Wednesday’s decision. He added it is clear the labour market breakeven rate has come down significantly but could say the breakeven rate is between 0 and 50k. Powell noted that policy had been skewed towards inflation, but is now moving in the direction of a more neutral policy, which will be better for the labour market. On the balance sheet, he said they are still in an abundance of reserves, but he does not think it would have a macro effect. The Bank of Canada cut interest rates by 25bps to 2.50%, in line with expectations. This takes rates 25bps below the midpoint of the BoC’s neutral rate estimate from the July MPR. Governor Macklem said there was a clear consensus to cut rates, while the statement noted that the reduction was appropriate given the weaker economy and fewer upside risks to inflation (like the removal of most retaliatory tariffs on imported goods from the US). It also felt a cut was appropriate to better balance the risks. On the labour market, the statement noted that job losses have largely been concentrated in trade-sensitive sectors while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions. It also acknowledged the 7.1% Unemployment Rate in August, while wage growth has continued to ease. On inflation, it noted on a monthly basis that the upward momentum seen earlier this year has dissipated, while a broader range of indicators continue to suggest underlying inflation is running around 2.5%. It removed its language from July that in the event of a weakening economy, and if inflation pressures are contained, “there may be a need for a reduction in the policy interest rate”. Instead, acknowledging how the “Governing Council is proceeding carefully, with particular attention to the risks and uncertainties.” It acknowledged that the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity. Looking ahead, ING suggests yesterday’s cut should not be the last one, noting how, despite no forward guidance, the central bank is keeping options open, and the assessment on inflation, growth, and the labour market points to another Q4 cut. ING expects a cut in December, but cannot exclude October and even further easing beyond that, noting that the Canadian Dollar should remain unattractive. Elsewhere, both Oil and Gold closed lower by 0.75% and 0.3% respectively.
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