Fed review: Going for the soft landing

The Federal Reserve cut rates by 50bp in the September meeting, against our call for only a 25bp cut. The new policy rate target is 4.75-5.00%.
The updated dots signal a total of 50bp of additional cuts in 2024, 4x25bp of cuts in 2025 and 2x25bp cuts in 2026. Relative to our call, the Fed signals a longer but more gradual rate cutting cycle.
Powell downplayed recession risks despite the larger-than-expected cut, and most of the decline UST yields and weakening in USD FX reversed over the course of the press conference.

Danske Research Team Danske Bank A/S

Markets were historically divided between 25bp and 50bp cuts going into the FOMC’s September decision. Powell accompanied the larger rate reduction with an overall positive assessment of the economy, ending the press conference saying: ‘I don’t see anything in the economy right now that suggests likelihood of a downturn is elevated.’

The larger move was motivated by a significant shift in the Fed’s risk assessment. 12 out of 18 participants saw risks to unemployment rate tilted to the upside (prev. 4 participants), and the median unemployment rate forecast was revised up through 2024 2026. While GDP forecasts were left mostly unchanged, 7 participants saw risks tilted to the downside also for growth (prev. 3). Inflation is seen stabilizing to 2% faster than previously expected with a balanced risk outlook.

Powell also mentioned that ‘it feels to me that neutral rate is probably significantly higher than it was pre-pandemic’. The median long-term ‘dot’ shifted to 2.9% (from 2.8%) with 7 participants now seeing the long-term rate at or above 3.25% (prev. 4). So, while the risk assessment and distribution of individual dots suggest that the Fed is open for faster rate cuts in the near-term if needed, rates could stabilize at a higher level longer-term.

Download the Full Report!

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates

Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold: Volatility persists in commodity space

After losing more than 8% to end the previous week, Gold remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000. The US economic calendar will feature Nonfarm Payrolls and Consumer Price Index data for January, which could influence the market pricing of the Federal Reserve’s policy outlook and impact Gold’s performance.

Week ahead: US NFP and CPI data to shake Fed cut bets, Japan election looms

US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.