Fed cuts by 25 bps, but fails to deliver a dovish surprise

The Fed has cut interest rates by 25bps as expected and also reduced its forecast for interest rates in 2025. The Dot Plot shows that the median estimate for rates this year has been revised down to 3.625% from 3.875%in June. The forecasts for further out the curve have been left unchanged, and the terminal rate was also unchanged at 3%, signaling a 5 more rate cuts in this cycle.

President Donald Trump’s newest FOMC appointee, Stephen Miran, was the only dissenter, voting for a 50bp cut. This is surprising, many had thought that Christopher Waller would also vote for a larger cut. Although the lone dissenting voice calling for a 50bp cut could be seen as relatively hawkish, the market is taking the Fed decision in its stride. The dollar is mostly unchanged, stocks are mildly lower and yields haver been choppy and are now mildly higher on the day.

Why such a mild market reaction?

The gold price is moving lower, which is to be expected especially as the call for a 50bps cut were few and far between. The fairly mild reaction to the Fed meeting is down to a few reasons. Firstly, the Fed has essentially ratified the market view that there is a strong likelihood of two further rate cuts this year, secondly, the latest Dot Plot suggests that the Fed will embark on the next stage of its rate cutting cycle, and thirdly, traders may end up dismissing this meeting altogether since their will be a large turnover of FOMC members in the coming months.

FOMC turnover likely to impact future Dot Plots

This last point is worth noting. There will be a new chair in May 2026, when Jerome Powel steps down. This new chair will be picked by the President and his team, and will no doubt be keen to pursue his own agenda and not follow Powell. However, the market is expecting the bulk of cuts to come during Powell’s final months as Fed governor, which may see the President lay off Jerome Powell in the near term, although he might get another berating on Trump’s Truth Social for not cutting rates by 50bps today.

The Fed Governor’s message could boil down to this: yes inflation is above target, but the jobs market is clearly weakening, which is our number one concern. This is why it is beneficial to have a dual mandate, the BOE could justify a similar message by the data, however it has a sole mandate to achieve 2% inflation.

It was always hard for this meeting to deliver a dovish surprise, which is why the market moves have been small so far. This meeting delivered exactly what the market expected: a succession of future rate cuts, most of them front-loaded for the rest of this year.

The market reaction

US stocks have whipsawed around in the aftermath of the meeting, up one minute and down the next. However, we do not see this decision as being an impediment to future stock market gains, even if it triggers short-term stock market volatility.

FOMC meeting has recipe for further stock market gains

Stock markets usually love when interest rates are cut and the economy is strong but not overheating. That is exactly what the Fed is forecasting. The FOMC has revised higher its expectations for growth in 2025, 2026 and 2027, the Fed is now expecting GDP to expand by 1.6%, 1.8% and 1.9%, respectively. In the longer run, the FOMC projects growth to be 1.8% in 2028. The unemployment rate is projected to decline in 2026 and 2027, and the PCE rate is expected to rise next year, but only mildly.

Jerome Powell’s press conference will be watched closely, as usual. However, with such a large turnover of FOMC members in the coming months, it is hard to know if anything Powell says tonight will actually materialize. Once Trump announces his choice for replacement Fed chair, Powell will essentially become a sitting duck.

Is Miran’s uber-dovishness a sign of things to come?

Thus, the market may not take too much notice of Powell’s tough talk on tariffs, he said that the danger is that tariffs create a permanent uplift to inflation.  The new Dot Plot is a mish-mash of rate expectations over the next 2 years. Interestingly, one member thought rates should end 2025 below 3%, which is most likely Stephen Miran’s forecast. This means that he wanted all 3 cuts this year to be 50bps. If Miran is a sign of what’s to come from Trump’s FOMC picks, then the gold price is unlikely to sell off for long.

For now, the gold price is having the largest reaction to this meeting, and is down more than $40 per ounce, most likely because Powell has highlighted the upside risks to inflation. It was always going to be hard for this week’s FOMC meeting to deliver a dovish surprise, so a pullback in gold is to be expected.