The Fed has cut interest rates more significantly, but at the same time, it didn’t frighten the market with fears of a recession. Powell emphasized the strength of the US economy several times, focusing on the still robust job market that is progressively cooling down. There was no declaration of victory in the fight against inflation, and it was also highlighted that a 50 basis point downward move should not be seen as a benchmark for the future pace of monetary easing. The American central bank executed this perfectly, cutting rates further while not provoking any sense of uncertainty in market participants.
After maintaining the cost of money at high levels for 14 months (5.25%-5.5%), the Federal Reserve decided to start the cycle of reductions later than other central banks. Economists were expecting a half smaller move. However, the market had increasingly been expecting a stronger change in recent days. At one point, the probability assessed by future contracts increased to over 70%. Just before the decision, it slightly fell below that level but was still high. It meant that if the Fed decided on a smaller change, the market might consider it to be a bigger surprise. Possibly, the Federal Reserve did not want to disappoint the market due to these increasing expectations? This, of course, is a far-reaching interpretation that remains speculative. Notably, there was one dissenting vote from Bowman, which is rare.
I had the impression that the press conference was designed to reassure the market. One can say that the objective was achieved. There was a risk that a more significant cut would induce risk aversion, as investors might interpret it as a signal that a severe slowdown or even a recession is impending. Therefore, Powell emphasized several times how strong the American economy remains. He took the decision based on the significant cooling of the job market. According to the chairman, it is less tense now than in 2019, just before the pandemic, hence it is no longer the primary source of inflation. Powell described the process of rate cuts, which have now started, as a “recalibration” of monetary policy. Despite the initial rate move of 50 bp, the Fed is not in haste for another identical operation. Even though the central bank keeps all options open (macro data will be critical), it indicates that further major reductions may not necessarily be expected.
According to the ‘dot plot’ chart and forecasts, there will be a total rate cut of 50 basis points this year, which amounts to 25 bp at each of the two meetings. The market didn’t increase its expectations. On the contrary, future contracts reduced the pricing chances of a more aggressive 50 bp cut in November and December.
Today, futures on American indexes are gaining. The dollar is weakening, gold is becoming more expensive, and the yields on US debt are decreasing.
Łukasz Zembik Oanda TMS Brokers
Source: https://managerplus.pl/powell-luzuje-polityke-monetarna-mocniej-ale-swoja-decyzja-nie-wprowadza-paniki-66229
