A reluctant Fed?
Overnight, the Federal Reserve delivered its latest monetary policy decision. A cut was widely expected, however, a lack of available data caused by the recent government shutdown had cast doubts on the Reserve’s ability to take action. That doubt has played through in their decision. Benchmark rates were cut 25-basis points to a 3.5-3.75% target range. However, the vote was not as clear cut as that which has followed other recent meetings. Two dissenting votes were recorded that wanted to see rates kept on hold. In addition to this, surveys published alongside the headline decision showed greater appetite than the ultimate decision for an on-hold outcome.
In response to the decision the Dollar moved lower. However, because of that residual hawkish flavour caused by a possible reluctance to deliver a cut, the losses were contained. The Fed continues to see one further cut in 2026, in contrast to the market which continues as of market open today to seek two. As a reminder, the bumper non-farm payroll report is expected next Tuesday 16th. The validity and comparability of this data point will be of course questioned but could validate claims that the state of employment is worse than many expect.
There were two notable elements of last night’s decision that could either support the Dollar or, more realistically, limit its downside. Those were both noted by Chair Jay Powell: firstly, growth forecasts from the Fed have improved as a result of the conclusion of the government shutdown. Secondly, the impact of tariffs on inflation looks to be more limited or at least slower to transmit into price levels than had been feared. The Fed will continue to be led by inflation and labour performance, the latter of which remains highly obscure as of today. However, there does seem to be a goldilocks scenario in which inflation demands lower rates whilst economic growth remains positive, even favourable.
Discussion and Analysis by Charles Porter
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