The Fed has decided on a 50 basis points cut, which means that the vast majority of economists were wrong in their predictions, but the market accurately estimated the intentions of the Fed. The decision to cut interest rates more aggressively is essentially an announcement of victory over inflation. Portraying it differently could be an admission of a mistake in previous communication. Nonetheless, a new set of Fed forecasts indicates that the Fed is changing its focus from inflation to the labor market, which should lead to a fairly aggressive path of interest rate cuts.
In his statement, Powell pointed out that the Fed has almost complete confidence in achieving its inflation target within the forecast period. At the same time, both the statement and Powell himself indicated that the labor market has clearly slowed down, therefore the Fed’s actions will be more balanced at this point: not only inflation but also the labor market will be important.
The key to today’s decision is not only a strong reduction or the prospect of strong cuts in the future, but economic forecasts. The Fed sees steady growth at a rate of 2.0% in the coming years and in the long term. Of course, the unemployment rate has been increased to 4.4% for this and the following year, but these are still not levels that would suggest an economic recession in any way. The Fed simultaneously lowers forecasts for inflation, thereby giving itself a strong mandate for further strong reductions. The dot-plot, or forecasts of Fed members, suggest that we should expect 2 or even 3 cuts this year, while 4 to 5 cuts are expected next year. Ultimately, interest rates are to be reduced to just below 3%.
Such a decision and such a set of forecasts clearly support Wall Street investors and the prospect of a further weakening of the dollar. Of course, a lot can still happen in the coming months, but if the economy behaves as the Fed forecasts, we are in for very good coming months in the markets. After the decision alone, there was a clear weakening of the dollar: the EURUSD pair rose to levels close to 1.1190, while the USDPLN fell to PLN 3.81, with the prospect of possibly dropping below PLN 3.80 in the coming weeks. The S&P 500 rose about 0.4% after the decision, while the Nasdaq gained 0.7% during Jerome Powell’s conference.
Author: Michał Stajniak, deputy director of XTB Analysis Department.
Source: https://ceo.com.pl/mocne-ciecie-stop-przez-fed-ogloszenie-zwyciestwa-nad-inflacja-i-wsparcie-dla-rynkow-53940
