U.S. Indexes, Treasuries, and Gold saw notable selling, while the U.S. Dollar soared in the wake of a very hawkish Powell at the Fed press conference. In the decision beforehand, it cut rates by 25 basis points, as expected, to 3.75-4%, albeit in a 10-2 decision. Governor Miran dissented for a 50bps reduction, as he said he would, while Schmid opted to leave rates unchanged. It also announced it will end the balance sheet contraction from December 1st; two-way action was seen in markets. However, Powell started his press conference by noting there are strongly differing views on how to proceed in December, with another cut far from assured. He added that Wednesday’s cut was another risk management move, but going ahead, it is different. Continuing to add to the hawkish rhetoric, the Chair noted there is a growing chorus of feeling they should maybe wait a cycle [regarding another cut]. As such, a hawkish reaction was seen with T-Notes tumbling, the S&P falling beneath 6900, and spot Gold testing USD 3.9000/oz to the downside. The Dollar surged to the detriment of G10 peers, with both the Swiss Franc and Sterling the laggards, as DXY rose to highs of 99.356 from earlier lows of 98.62. Money markets are now pricing in a 64% chance of a 25bps rate cut, vs. 92% in the immediate aftermath of the rate decision for the December Meeting. The crude complex was firmer and boosted after larger-than-expected EIA draws and was largely unmoved after hawkish Powell. There was a deluge of earnings, and NVDA (+3.1%) strength propped up Tech, as it topped USD 5 trillion market cap for the first time, but breadth was very narrow with the equal-weighted S&P 500 lower by ~1.1%. Ahead, there are five Mag-7 earnings before Friday, with lots of focus on the Trump/Xi meeting overnight. The Federal Reserve cut rates by 25bps, as expected, to 3.75-4.00%, albeit in a 10-2 vote. On the dovish end of the spectrum, Governor Miran voted for a 50bps reduction, as he had touted prior to the meeting, while Schmid voted to leave rates unchanged. Within the statement, given the US Government shutdown and regarding the outlook, it notes that available indicators suggest that economic activity has been expanding at a moderate pace (prev. recent indicators suggest growth of economic activity moderated in the first half of the year). Meanwhile, on the employment side of the mandate, the statement judges that downside risks to employment have risen in recent months, while on inflation it continues to note that it has moved up since earlier in the year, and maintains that inflation “remains somewhat elevated”. The Fed also announced changes to its balance sheet from December 1st. The Fed will reinvest all maturing holdings of Treasury securities, and it will reinvest all the payments from mortgage-backed securities into Treasury bills, allowing the Fed’s holdings of MBS to continue to roll off the balance sheet. The Fed has previously signalled it wants a Treasury-only balance sheet, given housing market conditions. Fed Chair Powell was hawkish in his press conference, with the main takeaway being that a December rate cut is not a foregone conclusion, and there are differing views on the Committee regarding a December rate cut. However, there was considerable support for yesterday’s decision, calling it another risk management move, but going ahead, it is a different story. He also warned that, amid a lack of official government data, “driving in the fog, you could slow down”. He was also asked about other reasons why the Fed could enter a pause, noting that the Fed has already moved 150bps from peaks, and is currently in the area where many estimates of the neutral rate are, hence some think it is time to take a step back. He also said that there is a growing chorus of feeling that maybe they should wait a cycle [to cut again]. Powell still sees policy as modestly restrictive. He noted CPI was a little softer than expected, while inflation away from tariffs is not far from the 2% goal, suggesting it may be 0.5-0.6% above target. Note, we will not see the official PCE report on Friday for September, but Powell estimates headline PCE and Core PCE both rose 2.8% (prev. headline 2.7%, core 2.9%). The Chair does not see weakness in the job market accelerating but highlighted that they have not seen the September payroll report due to the government shutdown, but state-level claims data is not suggesting a significant deterioration. On the balance sheet, the Fed said the December 1st date for ending the balance sheet contraction gives the market a little time to adapt, and that it is clear they are only slightly above an ample level of reserves. Powell also noted they do want to move the balance sheet to shorter-duration, but have not decided on an endpoint, and they want the balance sheet duration to fall very gradually. The Bank of Canada cut rates by 25bps, as expected, taking rates to 2.25%, matching the bottom end of the BoC’s neutral rate estimate. The BoC maintained the view of their neutral rate despite the rate cut, suggesting that any further rate cuts would be accommodative. The BoC described current interest rates as “about the right level”, implying there is little room left for more easing, or at least the BoC will observe effects of recent easing before acting again, depending on how the economy evolves. The statement said that if the outlook changes, they are prepared to respond. It also noted that the structural damage caused by the trade conflict reduces the capacity of the economy and adds costs, noting this limits the role that monetary policy can play to boost demand while maintaining low inflation, suggesting there is not much more monetary policy can do. Both these additions to the statement suggest a clear holding bias from the BoC. Within the MPR, the BoC returned to a base case scenario. It sees Q4 25 growth (Y/Y) at 0.5%, down from the 1.9% seen in the January MPR (before the BoC switched to a scenario-based approach) and compares to the July MPR of 0.7%. Headline CPI in Q4 25 is seen at 2.0% (down from 2.4% in January, up from 1.9% in July). Core CPI is seen at 2.9% (up from 2.1% in January and down from 3.1% in July). Analysts at RBC note that their base case assumes no further rate reductions, and they expect a ramp-up in fiscal stimulus to do a lot of the heavy lifting in the policy response to address tariff-related issues in the economy. Elsewhere, Oil closed flat while Gold closed a further 0.6% lower.
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