Dollar lower after Fed cuts rates
The Fed cut its policy rate by 25bps to 3.5%-3.75%, as expected, noting that “downside risks to employment appear to have risen in recent months”. There were three dissents, with one member voting for a larger 50bps cut and two voting to keep rates unchanged. Fed Chair Powell said that, with rates having been cut by 75bps since September (and by 175bps in total since September 2024), monetary policy is now well-positioned to ‘wait and see’ how the economy evolves. This suggest a pause to rate cuts, though Powell kept the door open to further policy easing next year. The initial market reaction saw US stocks rise and US bond yields fall, while the dollar weakened. The euro has gained around half a cent against the US currency, trading at $1.17, while sterling has edged up to about $1.3375. EURGBP is marginally firmer this morning, hovering around £0.8750.
US government bond yields fell following the Fed meeting – partially reversing the rise in yields that had occurred over the previous few days – as the market priced back in some of the policy easing it had taken out lately, with 2- and 10-year yields ending the day around 8bps and 5bps lower respectively. In equity markets, the S&P 500 added to its gains post Fed, closing up around 0.7% at a new record high. However, disappointing results from Oracle after hours has contributed to weaker markets in Asia overnight, while European stocks are slightly lower at the open this morning (with US indices set to follow suit later according to the futures market).
In its updated economic projections, the Fed raised its forecast for GDP in 2025-2026, though growth is still expected to moderate to around 2% from 2.8% in 2024, while forecasts for inflation were revised down a little with headline and core inflation seen falling back to circa 2.5% by the end of 2026 from around 3% in the final quarter of this year. The unemployment rate is seen nudging up a bit further from the current 4.4% before edging down during the course of next year. The Fed’s updated interest rate ‘dot plot’ guided one 25bps cut next year and another 25bps reduction in 2027.
ECB member Simkus says inflation in the Euro area is “more or less” in line with the 2% target, “which suggests no need for a change in interest rates — not only at the next meeting in December (18th) but also at further meetings”. Meanwhile, Christine Lagarde says the economy is proving more resilient than expected, with forecasts for GDP growth likely to be revised up at next week’s meeting.
Looking to the day ahead, markets will continue to react to the outcome of the Fed meeting. It is quiet on the economic data front, with weekly jobless claims in the US the only release of note.