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.

Danske Research Team Danske Bank A/S

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.

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.

AUD/USD edges higher as hot CPI inflation and hawkish RBA lift rate hike bets

The AUD/USD pair gathers strength to near 0.7035 during the Asian trading hours on Friday. The Australian Dollar edges higher against the US Dollar as hotter Australian CPI inflation data has bolstered expectations of Reserve Bank of Australia rate hikes.

USD/JPY meets support near 157.00

USD/JPY retreats for the third consecutive day on Friday, revisiting the 157.00 region before attempting some recovery as investors continue to assess the latest BoJ meeting, where the central bank left rates unchanged, as widely anticipated.

Gold sinks to fresh yearly lows despite risk-off mood as Fed rate hike bets weigh

Gold slips to fresh year-to-date lows on Friday. The metal struggles despite a risk-off mood across markets, as expectations of further Federal Reserve (Fed) interest rate hikes continue to dominate price action, leaving Gold on track to end the month in negative territory.

Ripple Price Forecast: XRP bulls defend $1.20 as sell-side pressure triggers liquidations

Ripple (XRP) trades around $1.25 on Friday, rising from a short-term support level established at $1.20. This minor upward correction follows a sharp sell-off, triggered amid reports of a hack attack on the Binance exchange that impacted approximately $6.3 billion. The attack drove the broader crypto market on edge, as Binance suspended both deposits and withdrawals to contain the situation.

BoJ recap: A pause for now... but Japan has entered a new inflation phase

The Bank of Japan left its short-term policy rate unchanged at 1.25% but delivered a distinctly hawkish message on the risk of an inflation overshoot. The decision passed by 8-1, with board member Takata dissenting in favour of an increase to 1.5%, while Governor Kazuo Ueda stressed that the Bank would continue adjusting policy as needed.

The 2% inflation target came from a throwaway remark. It now moves trillions

The Federal Reserve's 2% inflation goal grew out of an off-the-cuff remark by a New Zealand politician in 1988. Bond investors still price long-term US debt as if 2% holds, so a change in how the Fed measures inflation would move markets.