The Federal Reserve Bank started the easing cycle with a cut of 50 basis points. The Fed "recalibrated" the policy stance away from when inflation was high and employment low. The baseline is now inflation is steady, and the employment is not as low. The Fed wants to get the rate down. It wants to take some of the restrictiveness out, BUT the economy is not falling out of bed.

With two meetings to go, the Fed still sees 2 more cuts of 25 basis points. Is that 25 and 25 basis points in November and December or is it nothing and 50 basis points in December. The market still sees 125 basis points in 2024 (inclusive of the 50 bps today) while the Fed only 100 basis points.

Looking at comments, bucketing the comments into topics looks like this:

Here are Fed Chair Powell’s comments organized by topics:

Economy

  • Powell does not see anything suggesting an elevated likelihood of a downturn in the economy.
  • GDP growth is expected to remain solid.
  • Retail sales and Q2 GDP indicate the economy is growing at a solid pace.
  • Consumer spending has remained resilient.

    Summary: The economy is good.

Interest Rates and Inflation

  • Rates will move toward more normal levels over time, but the Fed is not declaring victory on inflation yet.
  • Inflation has eased but remains above the Fed's 2% target.
  • Wage increases are slightly above the Fed's 2% inflation goal.
  • Longer-term inflation expectations are anchored, and the Fed's patient approach has been effective.
  • The Fed is not behind the curve on rate moves, reflecting the Fed's commitment to not fall behind.
  • No expectation of a return to negative rates for long-term bonds.
  • Projections show a wide range of estimates for the neutral rate.
  • The Fed's policy stance remains restrictive to bring inflation down.

Summary: Still hedges against inflation and that will keep the declines in rates measured. The neutral or perhaps terminal rate is anyone's guess.

Labor Market

  • The unemployment rate remains healthy.
  • Labor market participation is strong.
  • Job vacancies remain strong, and quits have normalized.
  • The labor market is less tight than it was before the pandemic.
  • Powell acknowledges rising downside risks to employment.
    • Further declines in job openings may impact unemployment directly.
    • Immigration has helped manage unemployment levels.
  • The Fed may be at its mandate for full employment but will monitor and adjust to support the labor market.
  • No loosening in the labor market is necessary to reach the Fed's 2% inflation goal.
  • Now is the time to support the labor market while it is strong.

    Summary: Not panicking on unemployment going higher

Housing

  • Housing inflation is lagging.
    • Market rents are not coming down as expected.
    • The housing market is frozen due to higher rates.
    • Powell expects the housing market to normalize as rates come down.
    • The main issue in housing is a lack of supply.
  • Housing sector investment fell in Q2.

    Summary:Same ole same ole. Not enough supply. If rates come down, maybe people move but rates need to come down and give people a reason to sell/move.

Monetary Policy

  • The Fed is operating on a meeting-by-meeting basis with no preset course.
    • Adjustments will be made as necessary based on economic conditions.
    • The Fed can speed up, slow down, or pause rate cuts as needed.
    • Policy will continue to restore the supply-demand balance.
  • Balance sheet and policy rate moves are part of normalizing the economy.
    • Banks are improving IRR management and are well-positioned for anticipated cuts.
  • The Fed’s reserves are stable and expected to remain abundant.
    • There are no plans to stop the runoff anytime soon.

Summary:All is on the table except raise rates going forward. No preset roadmap despite the dot plot I guess.

General Commentary

  • No one should assume that current conditions reflect a new pace of growth.
  • The Fed's decisions reflect patience and are timely to ensure the Fed stays ahead of economic trends.

    Summary: A bit of a pat on the back for being patient and suggests the Fed is leading the economic shifts to continue to glide into the soft landing.

The next meeting is not until after the November election. That perhaps may have been the main reason for 50 bps now. Between now and November 7 there will be:

  • Employment: October and November
  • CPI and PPI: October
  • PCE and Core PCE: September and October

The market reaction in the forex was for the USD to move lower. However, as the commentary continued, and technical targets could not be reached, the flow of funds started to whittle away at the dollars declines. By day's end, the greenback was surpassed by the CAD as the weakest of the major currencies, and although the USD is lower, it is more near unchanged on the day vs the EUR, JPY, CHF, CAD and AUD (changes of 0.2% to 0.11%). The dollar was lower by 0.30% vs the GBP and the NZD. What we know for sure, is the dollar whipped traders around. The GBP and the NZD are ending as the strongest currencies today.

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US stocks also whipped around with gains being erased by the close and the major indices closing lower on the day.

  • Dow industrial average, -0.25%
  • S&P index, -0.29%
  • NASDAQ index, -0.31%
  • Russell 2000, +0.04%

Looking at the US debt market the 2 and 5 year are near midpoint levels on the day, while the longer 10 and 30 year are near the highs. All points on the curve are higher despite the cut in rates:

  • 2 year yield 3.69%, +3.6 basis points
  • 5 year yield 3.491%, +5.8 basis points
  • 10 year yield 3.707%, +6.6 basis points
  • 30 year yield 4.027%, +7.5 basis points. .

In other markets:

  • Crude oil is lower hundred day by about 1.05%.
  • Gold - after extending to new all-time highs after the cut (at $2600.14) - is trading at $2558 or -0.43%.
  • Silver is trading down -2.10% and $30.03
  • Bitcoin is just above the $60,000 level at $60,195.

Tomorrow the BOE is expected to keep rates steady after cutting last meeting with the vote being 5-4. Today, the GBPUSD moved up to test the low of a swing area from 2021-2022 at 1.32977 to 1.3358. The high reached 1.32972 and is trading at 1.3208 at the close. Will the BOE push the pair back to the target? The decision will be at 7:00 AM ET.

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