Both Equity and Bond Markets were choppy in response to the FOMC Statement. The 50bp rate cut and dot plots implying a further 50bp of cuts in 2024 sparked a typical dovish reaction with stocks, bonds and gold rallying while the Dollar was slammed. However, assets were off extremes heading into the Powell Press Conference before things turned more hawkish with stocks, bonds and gold finishing the US session in the red, while the Dollar reversed higher. The turnaround in the presser was seen after Powell kept future options open noting that decisions will be made in a meeting-by-meeting approach, while also suggesting to not take yesterday’s move and think of it as the new pace. He also did little to signal concern on the economy and spent a lot of the presser talking up the state of the economy, while adding that Wednesday’s 50bp move was a sign of the Fed’s commitment to not get behind the curve. He also said that he thinks the neutral rate is higher than it was (see below for a full summary of the FOMC and Press Conference). Elsewhere, sectors were predominantly lower with underperformance in Utilities, Tech and Consumer Staples, while Energy, Communication and Industrials underperformed, with only Energy closing green. Oil prices were choppy in response to bullish inventory data and ongoing Middle East geopolitics, as well as the Fed policy announcement. In FX, Sterling outperformed after CPI data was largely as expected but saw marginally hotter than expected core and services Y/Y figures ahead of the Bank of England decision on Thursday, which is expected to maintain policy in a 7-2 vote split. The Japanese Yen was volatile to the FOMC, with strength seen on the rate cut before completely paring and more after the aforementioned presser. The FOMC cut rates by 50bps, taking the target for the federal funds rate to 4.75-5.00%, more in fitting with money market pricing before the release rather than the analyst consensus of 25bps. There was one dissenter; Governor Bowman opted to vote for a smaller 25bp rate reduction. Within its projections, the 2024 rate forecast was revised down to 4.4% from 5.1%, which implies a further 50bps of easing from current levels. The projections showed that nine of the 19 policymakers see the policy rate above the median forecast for 2024, nine at the median, while one sees it below that. The Statement saw some changes: it noted inflation has made further progress but remains somewhat elevated, and it added it has gained greater confidence inflation is moving sustainably towards 2%, and judges risks to achieving its goals are roughly in balance. However, it left its guidance unchanged, noting that “the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” but it said that it is strongly committed to “supporting maximum employment” and returning inflation to its 2% objective (previously it only referenced inflation). Further out, the FOMC’s median projections see the 2025 rate at 3.4% (prev. 4.1%), and end-2026 dot at 2.9% (prev. 3.1%), where it also sees the neutral rate (2.9% vs prev. 2.8%). Money markets are still pricing in a risk of another 50bp rate cut with 74bps priced through year-end to 4.00% (prev. 4.2% pre-meeting). However, looking ahead to 2025, rates are seen bottoming at 2.8% in October 2025, with the volume of rate cuts that markets are pricing unchanged from before the announcement. Elsewhere in the SEPs, the unemployment rate was revised up throughout the forecast horizon, but the longer run was unchanged at 4.2%; PCE and Core PCE were revised down for 2024 and 2026, while growth saw a revision lower in 2024 but was unchanged throughout the forecast horizon. Fed Chair Powell used the press conference to stress that the Fed is not on a pre-set path and that decisions will be taken on a meeting-by-meeting basis (something he stressed several times), noting the Fed can go quicker or slower, or even pause if it is appropriate – maintaining maximal optionality in their guidance. However, he did also add that no one should think that this is the new pace. He also toed his usual line on SEP meetings that projections are not a plan or decision and also highlighted that the range of views in the SEPs are varied. When asked about why the Fed moved by 50bps, he said there has been a lot of data, including in the blackout period, but he highlighted how the BLS labour market revisions show that payrolls may be revised down – he later stated the Fed will mentally tend to adjust payroll numbers based on the QCEW. He also stated that downside risks to employment have increased. Elsewhere, he did not seem too concerned about the economy, noting that retail sales data and Q2 GDP indicate the economy is growing at a solid pace, which will also support the labour market. He also noted how they are not seeing rising claims or layoffs, but they are not waiting for that to happen, the time to support the labour market is when it is strong. Powell said the unemployment rate is still at a healthy level, participation is at a good level, quits have come back down to normal levels, and vacancies are still at a pretty strong level. Wage increases are still a bit above being consistent with 2% inflation. On inflation, Powell said they will ultimately get down to 2% inflation. When asked if ‘’50’’ means the Fed are behind the curve, Powell stressed the Fed does not think this is the case, noting they have been patient where other central banks have already started to cut. He said they are moving at a pace that they think is appropriate, but no one should look at today and think this is the new pace. On the Neutral Rate, Powell said it feels that the neutral rate is probably significantly higher than it was pre-pandemic, adding the Fed is recalibrating their policy over time to be more neutral. On the balance sheet, Powell said the Fed is not planning to stop the run-off any time soon, noting that both balance sheet and policy rate moves are a form of normalisation. Elsewhere, Oil closed Wednesday 1.66% lower while a stronger Dollar saw Gold end yesterday’s session with a 0.3% loss.
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