For weeks, the July FOMC meeting has been billed as a game changer. There have been significant swings around not whether the FOMC would cut rates, but of how many. With a rate cut having been fully priced in for weeks, it has been a case of just how dovish the Fed would be, and how would it guide for future meetings. We take a look at the implications of today’s decision.
This was a meeting statement with something for everyone. 25 basis points of cut was the bare minimum expected. However, the doves will be pointing to options open for more cuts and the balance sheet reduction programme ending two months sooner. However, the Fed still remains data dependent and there were two hawkish dissenters.
FOMC statement changes
There was a huge amount in the statement changes. Primarily the key takeaways include:
- Market based measures of inflation remain low
- Global outlook is a concern, as is muted inflation, along with uncertainties with the Fed’s own outlook of the domestic economy.
- The Fed will remain data dependent
- There is a whole section new that says that the balance sheet reduction will end in August which is two months earlier than previously guided.
- There were two dissenting voices, notable hawks Esther George and Eric Rosengren. They clearly were not persuaded by Fed chair Powell and vice chair Richard Clarida who seem to have been pushing for a 50 basis point cut.
No projections this time but…
Still there is a lot here that opens the door to suggest that the Fed is not one and done. Plenty of focus on inflation throughout reflects concerns over subdued inflation impacting on economic performance. The global economy is a concern and having uncertainties to the fairly upbeat domestic outlook, suggests that the Fed could move again on any deterioration. Data dependency is the key now.
However, the dissenting voters are an issue and the wait and see approach will have been disappointing for a market expecting a dovish steer.
This was a mixed/neutral rate cut from the Fed which is the bare minimum that the market had been looking for.
Overall, the doves come out slightly disappointed but the mixed bag has meant that markets have fluctuated in response. Yields higher initially are now back lower again. The dollar has strengthened, but not hugely, whilst equities have only been dragged mildly back.
Earlier today, the market was pricing in around 4 rate cuts in the next 12 months. Now in the wake of the Fed decision, this has driven traders to push for less dovish policy by around 3 basis points by July next year – a mildly hawkish response.
- US 2 year Treasury yield (+13bps) – the reaction has been a little choppy but the market certainly seems to be looking less dovish than it was earlier. Since Powell’s press conference kicked off, yields have gone even higher.
- US 10 year Treasury yield (+1bps) – a much less decisive reaction at the longer end. This means a significant flattening of the yield curve has been seen. This suggests rates are not going lower, but inflation and growth remains a concern for the market.
- EUR/USD (-40 pips) – The key move has been below $1.1100 which is a big support. Breaching on a closing basis would be a decisive signal lower.
- GBP/USD (-65 pips) – Cable has been volatile throughout the session so it should come as no surprise that the dollar reaction here is greater.
- USD/JPY (+20 pips) – the key resistance remains 109.00 and will be watched into the close
- Gold (-$5) – the range of the past week or so between $1411/$1433 remains intact for now, even if the dollar positive and less dovish than expected move has pulled gold lower. If gold hangs on to $1411 it would be an important feather in the cap for the bulls.
- S&P 500 (-8 ticks) – not the biggest reaction here but the less dovish than expected Fed is a drag on equities.