The Fed started its easing cycle by cutting interest rates by 50 basis points. The Fed has “reset” its monetary policy stance away from a period when inflation was high and employment was low. Now the baseline is that inflation is stable, and employment is not that low. The Fed wants to lower interest rates. It wants to take some of the brakes off, but the economy is not collapsing.
With two meetings remaining, the Fed is still expecting a 25bp rate cut. Is it 25bp in November and December or nothing and 50bp in December? The market is still pricing in 125bp of rate cuts in 2024 (including today’s 50bp) while the Fed is only expecting a 100bp rate cut.
When looking at the comments, the breakdown of comments into topics looks like this:
Here are Federal Reserve Chairman Jerome Powell’s comments, arranged by topic:
economy
Interest rates and inflation
- Interest rates are expected to move toward more normal levels over time, but the Fed has not declared victory on inflation yet.
- Inflation has declined but remains above the Fed’s 2% target.
- Wage increases are slightly above the US Federal Reserve’s 2% inflation target.
- Longer-term inflation expectations are anchored, and the Fed’s patient approach has been effective.
- The Fed is not behind the curve in interest rate moves, reflecting the bank’s commitment not to fall behind.
- There is no expectation of negative interest rates returning to long-term bonds.
- Forecasts point to a wide range of estimates for the neutral interest rate.
- The Fed’s monetary policy stance remains constrained to bring down inflation.
Summary: This is still a hedge against inflation, which should keep interest rates moderately low. No one can predict what the neutral rate will be, or perhaps what the ultimate rate will be.
Labor market
Housing
Monetary policy
- The Fed operates on a meeting-by-meeting basis, with no predetermined course.
- Necessary adjustments will be made based on economic conditions.
- The Fed can speed up, slow down or pause interest rate cuts as needed.
- Monetary policy will continue to restore the balance between supply and demand.
- Balance sheet and interest rate movements are part of the economic normalization process.
- Banks are improving their internal rate of return management and are well positioned to weather the expected cuts.
- The Federal Reserve’s reserves are stable and expected to remain ample.
- There are no plans to stop the runoff anytime soon.
Summary: Everything is on the table except future rate hikes. No pre-determined roadmap despite the dot chart I believe.
General comment
The next meeting will not be held before the November elections. This is probably the main reason for the 50 basis point rate cut now. Between now and November 7th there will be:
- Recruitment: October and November
- Consumer Price Index and Producer Price Index: October
- PCE and Core PCE: September and October
The market reaction in the forex market was to see the US dollar fall. However, as the comments continued, and technical targets were not reached, money began to flow in to reduce the dollar’s declines. By the end of the day, the Canadian dollar had overtaken the US dollar as the weakest of the major currencies, and despite the US dollar’s decline, it remained close to flat on the day against the Euro, Japanese Yen, Swiss Franc, Canadian Dollar and Australian Dollar (changes from 0.2% to 0.11%). The dollar fell by 0.30% against the British Pound and the New Zealand Dollar. What we know for sure is that the dollar has taken control of traders. The British Pound and the New Zealand Dollar ended the day’s trading as the strongest currencies.
US stocks also saw some volatility, with gains erased at the close, and major indexes closing lower on the day.
- Dow Industrial Average -0.25%
- S&P -0.29%
- Nasdaq -0.31%
- Russell 2000, +0.04%
Looking at the US debt market, 2- and 5-year notes are near midday levels, while 10- and 30-year notes are near their highs. All points on the curve are higher despite the rate cuts:
- 2-year yield 3.69%, +3.6bps
- 5-year yield 3.491%, +5.8bps
- 10-year yield 3.707%, +6.6bps
- 30-year yield 4.027%, +7.5 bps.
In other markets:
- Crude oil fell 100 days by about 1.05%.
- Gold – after extending to all-time highs after the cut (at $2,600.14) – is trading at $2,558 or -0.43%.
- Silver is trading down -2.10% at $30.03
- Bitcoin price reached $60,195 which is just above the $60,000 level.
The Bank of England is expected to keep interest rates on hold tomorrow after cutting them at its last meeting, with the vote being 5-4. Today, the GBP/USD pair rose to test the 2021-22 swing low at 1.32977 to 1.3358. The high was at 1.32972 and it is trading at 1.3208 at the close. Will the BoE push the pair back to target? The decision will be released at 7:00 AM ET.