Fed opts for 50bps cut

In the end, the Fed opted to cut interest rates by 50bps, to a range of 4.75% to 5.0%, at yesterday’s meeting, and – via its so-called “dot plot” – indicated a further 50bps reduction over the remainder of this year and another 100bps in 2025, a bit less than the market was (and still is) pricing in. The reaction in markets has been relatively muted. In FX, the euro and sterling spiked to intra-day highs of $1.1190 and almost $1.33 respectively (the latter also a new 2024 high for sterling) post the rate announcement, but have since retreated a little to around $1.1150 and $1.3250. The pound is a little firmer versus the euro, at 84.1p, ahead of the Bank of England’s interest rate announcement at noon today, with rates expected to be kept on hold at 5%.

In the bond market, US 2-year year yields fell slightly post the Fed’s announcement to end marginally higher on the day at 3.62%, while 10-year yields rose a little, finishing around 5bps higher at 3.70%. US equity markets closed a little lower, with the S&P 500 shedding around 0.3%.

At his post-meeting press conference following yesterday’s 50bps cut, Fed Chair Powell said the central bank is now “navigating” towards a neutral level for interest rates – which is in the vicinity of 3% according to the Fed’s estimates – saying it could move more quickly or more slowly than suggested by the interest rate “dot plot” depending on how the labour market and inflation evolve. The Fed raised its forecast for unemployment over the next couple of years, while lowering its forecasts for inflation, and reiterated that the balance of risks had shifted, with upside risks to inflation diminishing and downside risks to employment increasing.

Looking to the day ahead, the market expects the Bank of England’s MPC to remain on hold (at 5%) following its latest meeting, but it does see it cutting rates by 50bps over its final two meetings of 2024 in November and December. It is also pricing a further reduction in rates of around 75bps over the first half of 2025.

It is quiet enough in terms of economic data, with jobless claims and existing home sales scheduled in the US.