Fed review: Hawkish cut
|- The Fed cut its policy rate target by 25bp in its October meeting, as widely anticipated. Interest rate on reserve balances (IORB) was cut by an equal amount.
- Powell hawkishly underscored that the December rate decision is still far from a done deal. This led to a repricing of front-end rate expectations, with the implied probability of a December cut declining from above 90% to around 60%. EUR/USD rate declined to around 1.16.
- We make no changes to our Fed call and still expect a pause in December with the next cut in January.
- The Fed also announced an end to QT. Balance sheet runoff continues for mortgage-backed securities (MBS), but all maturing principal payments will be reinvested into T-bills from December 1 onwards. Markets were well prepared for the announcement with also the long-end UST yields shifting higher.
Ahead of the meeting, we expected Powell to avoid pre-committing to a December rate cut, but his clear pushback against the market pricing was more hawkish than even we anticipated. Powell emphasized that ‘another cut in December is far from assured’ amid the committee’s ‘strongly differing views’ about the future, and that ‘there is a growing chorus of feeling we should maybe wait a cycle’. He highlighted that despite the shutdown, available data does not signal significant further cooling in labour markets.
After the September meeting, we pointed out that the ‘dots’ signalled an almost even split between participants expecting cuts in both Oct & Dec, and those expecting only 0-1 cuts. We argued that markets underappreciated FOMC’s willingness to pause, as ahead of this meeting, markets were pricing more than 90% likelihood for another cut in December. We stick to our call and expect a pause in December followed by the next cut in January. We still think the Fed isthe bestserved by a more gradual approach towards further easing.
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