Powell delivers a hawkish cut
The Federal Reserve cut interest rates by 0.25 percent on Wednesday, as expected. This brought the reference interest rate to the target range of 4.25 to 4.50 percent. The decision was almost unanimous, with 11 Fed members voting for a 25bp cut and one member voting to keep rates on hold.
The market priced the chance of a 25bp cut at nearly 100%, as the Fed did a good job of telegraphing its plans in the weeks leading up to the announcement. What surprised markets was the hawkish forecast for interest rate movements in 2025. The Fed revised down its rate forecast, reducing the number of 25 basis point cuts next year to just two, compared to four in the September forecast. This led to a strong rally in the US dollar against major currencies, but stocks fell on Wall Street.
The rate statement indicates that inflation is moving in the right direction, but is still too high. Members noted that progress has been made in bringing inflation down to the Fed’s 2% target, but that it “remains somewhat elevated.”
Federal Reserve Chairman Powell said at a news conference after the meeting that he was “very optimistic” about the US economy and that the Fed was “significantly closer” to ending the current easing cycle. At the same time, Powell noted that the decline in inflation has stalled, saying, “We’ve been moving sideways relative to 12-month inflation.”
The US dollar rises, the stock markets fall
Currency markets showed strong movement following the Fed’s rate decision, as the US dollar posted strong gains against all major currencies on Wednesday. The EUR/USD currency pair was down 1.32% on the day, while the AUD/USD currency pair was down 1.90%. Both the Euro and Aussie recouped some of these losses early Thursday.
Major stock indexes fell on Wednesday as investors reacted negatively to the Fed’s signal that it plans just two interest rate cuts in 2025. Lower rates make it cheaper to borrow and buy stocks, and investors hoped the Fed’s aggressive tapering cycle would end interest rates continue into the next year.
The S&P 500 index fell sharply, falling 178.45 points (2.95%) to close at 5872.16 points. This is the second biggest drop in the index this year.
The Nasdaq 100 fell a whopping 791.77 points (3.6%) to close at 21,209.31.
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