Fed strikes dovish note with further cuts now 'set in stone'

As anticipated, the Fed lowered rates by a ‘standard’ 25 basis points on Wednesday - the first cut since December. We are somewhat surprised that only one dissenter, new Governor Miran, advocated for a jumbo cut, as we had expected at least one of Waller or Bowman to follow suit.

The statement is clearly dovish, with the jobs market no longer described as “solid”. Instead, the bank stressed that downside risks to employment had risen and that it is now more attentive to its dual mandate, denoting a clear shift in its focus away from inflation and towards supporting the labour market.

Meanwhile, the updated dot plot effectively confirms that further cuts are coming, with additional rate reductions in October and December now almost set in stone.

Yet, the Fed stopped short of fully endorsing market pricing for rates in 2026, with officials pencilling in just one additional cut next year, relative to the three currently priced in by futures markets.

This cautious stance suggests to us that the Fed is wary of reigniting inflation expectations and spooking the Treasury market, particularly in the long-end of the curve.