The Federal Reserve’s latest twist in monetary policy, reducing the fed funds for a second time in two months and then pausing for instructions has left markets without a clear direction on interest rates.

Equites which would have cheered a 50 basis point cut that no one expected, ended mixed. The Dow shed 52 points closing at 27,094 about 1% below its all-time high.  The S&P 500 was unchanged and at 3006 is just 21 points from its record. The Nasdaq gained 5.49 points to 8,182, about 2% below its historical top.

Treasury yields retreated. The 2-year generic lost 2 points from Wednesday’s close to 1.74% and the 10-year dropped 2 as well to 1.78%.  The spread between the two rates has narrowed to 4 points in the last two days after having finished at 10 points on Friday.

Reuters

The inversion of this curve for several days in late August, a well-known recession indicator, reversed in early September as US economic statistics suggested that the expansion and job creation remained intact. 

The dollar was mixed, rising against the euro and aussi but losing ground versus the sterling and yen.

After the July 31st FOMC when the bank cut the fed funds rate for the first time in 11 years, citing global and trade risks, markets quickly positioned for three reductions by the December 11th meeting.  For most of last six weeks the futures viewed a decrease at this week’s meeting as a near certainty.  But by Wednesday morning of the odds in the futures market had dropped to 70%.

In the event the Fed proved unwilling to disappoint market expectations which had been building for weeks. The potential reaction in the equity and credit markets if the FOMC had declined to reduce rates was enough to bolster the relatively weak economic case for a cut.

The assessment of the futures that the economic scenario for lower rates had faltered was accurate, even if it did not pertain specifically to Wednesday’s rate decision.  It fitted the Fed’s new set of economic and rate projections.  The central tendency for the fed funds had become 1.9% through the end of next year. In other words, based on their own economic projections, the governors   envisioned no rate changes for the next 15 months.  

Market can be forgiven for befuddlement at the Fed’s next move.

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!


Latest Forex Analysis

Editors’ Picks

EUR/USD pressured around 1.13 after jump in US jobs

EUR/USD is trading around 1.13, down after US Non-Farm Payrolls shocked with a leap of 2.5 million jobs in May, contrary to all projections. The greenback is gaining while stocks are falling, a correlation breakdown. ECB stimulus previously supported the euro.

EUR/USD News

GBP/USD retreats from highs

GBP/USD is trading below 1.27, off the highs. The pound is struggling after Chief EU Negotiator Barnier reported little progress in Brexit talks. Robust US jobs support the dollar.

GBP/USD News

XAU/USD retreats further to $1670, lowest in five weeks

Gold prices are falling sharply on Friday on the back of the US employment report that boosted equity markets and sent US yields to the upside. XAU/USD is losing more than $40 on Friday and recently bottomed at $1670/oz, the lowest intraday level since May 1.

Gold News

Institutional demand exceeds Bitcoins supply

Greyscale floods the market with fresh money to satisfy the demand of its clients. Investors, willing to pay a 29% surcharge for exposure to Bitcoin without suffering the legal and operational inconveniences. Market remains at risk on the verge of new bullish territory.

Read more

WTI rallies above $39 as focus shifts to OPEC+ meeting

Crude oil prices built on Thursday's modest gains and rose sharply on Friday boosted by the upbeat market mood optimism surrounding Saturday's OPEC+ meeting. 

Oil News

Forex Majors

Cryptocurrencies

Signatures