Quick note: This will be an abbreviated version as the SignalPlus team are at the Token 2049 conference in SG — come meet us in person!
Chairman Powell gave risk markets what they wanted with a 50bp cut, but was explicit in hedging the larger cut with confident statements that an economic soft-landing is still the base case, and repeated many times that the US economy is doing “just fine”.
Key takeaways:
Soft landing is still the base case with falling inflation. “The US economy is in a good place and our decision today is designed to keep it there.”, “The US economy is basically fine.” , “We will get down to 2% inflation, I believe.”.
Staying ahead of the curve. Powell committed to ‘staying ahead of the curve’ in terms of being reactive with rate cuts in case of any labour market slowdown, with a focus on the hiring rate (50bp move was a ‘sign of our commitment not to get behind’). The Fed raised the unemployment rate expectations to 4.4% for 2024 (vs 4.0%) and 2025 (vs 4.2%), and to 4.3% for 2026 (vs 4.1%).
50bp is meant to communicate a ‘strong move’. Powell confirmed that today’s 50bp move was a strong move, but gave the Fed wiggle room for future meetings by not necessarily commiting at this same pace going forward (‘nobody should assume that this is the new pace’). Basically, don’t be pricing in 50bp for an eternity, don’t be pricing in 75bp, but the Fed can do multiple 50s if the economic data warrants (“We’re always going to try to do what we think is the right thing for the economy at that time. That’s what we’ll do, and that’s what we did today.”).
It’s all about the hard data. The Fed will be focused on hard economic data over soft sentiment data going forward, with a particular focus on how the market will react to lower rates.
Everyone is on the same page. Powell noted that all 19 Fed participants committed to multiple cuts this year, with 17 indicating 3 more cuts, and 2 members indicating 4 more cuts as a “significantly different” development from June. The only dissenter was Bowman, who wanted only a -25bp cut this time.
Market Reaction
Rates: markets still pricing 2.5x more cuts in 2024, slightly ahead of the median Fed dot-plot. Bond yields barely moved after FOMC as the results were pretty much in line.
FX: USD weaker as the Fed delivered. Particular weakness JPY especially with the risk the BOJ to stay hawkish in their upcoming meeting.
Equities: Rallied as the Fed delivered a ‘strong’ ease while expressing the economy is still fine and inflation is still expected to come down
Crypto: BTC recovered 60k on the back of the strong equity move, with a strong performance in altcoins as a sign of an overall boost in risk sentiment.
