Dow Jones Industrial Average gives up Fed rate cut gains as quickly as they appeared
- After months of betting on "the next meeting", markets finally nailed down the Fed's first rate cut in nine months.
- The Fed's SEP implies Fed policymakers have agreed with rate markets that two additional cuts will be required by the end of the year.
The Federal Reserve (Fed) delivered a quarter-point interest rate cut, in line with market expectations. With the Fed moving to make its first rate cut since last December, investors are immediately pivoting to focus on how many rate cuts the Fed is expected to deliver through the remainder of 2025.
The Federal Reserve's Summary of Economic Projections (SEP) also indicates that Federal Reserve policymakers anticipate additional interest rate adjustments in the foreseeable future. According to the dot plot, most policymakers foresee interest rates stabilizing at approximately 3.5-3.75% by the end of the year, suggesting the potential for two further rate reductions through December.
The Dow Jones touched chart territory north of 46,250 for the first time ever following the Fed's rate announcement and SEP adjustment. However, Fed Chair Jerome Powell cautioned during his post-rate call press conference that the Fed is still tracking data from one release to the next, warning that the SEP is not a "preset course". US equities gave up the day's bullish gains and backslid back below 46,000 on reaction.
Fed Chair Powell noted that despite the appearance of odds of another 50 bps in rate cuts before the end of the year, the support for two more cuts isn't widespread throughout the Fed, limiting the potential dovishness of the Fed.
Read more Powell comments: No widespread support for 50 bps cut
Dow Jones 5-minute chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Joshua Gibson
FXStreet
Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.
