Market Mondays: A tale of two Feds

Markets went into last week’s Fed meeting priced for a decisively dovish turn. They got a cut and guidance that still points to more easing—but not as much or as quickly as the most bullish positioning implied. That nuance mattered for the short-term tape: a brief wobble in equities, a pop in yields and the dollar, and fresh momentum in gold. For traders, this remains a “buy dips in risk, fade extremes in rates/FX” environment—but with an increasingly political risk premium creeping in.

What the Fed actually delivered

The policy stance remains dovish in direction, with the Committee shifting emphasis from sticky inflation to a softer labour market—signalling comfort with further easing if growth and jobs continue to cool. However, the dot plot leaned less dovish than markets hoped, tempering the initial risk-on impulse.

Dissent dynamics underscored the caution: expectations for multiple voters pushing 50 bps didn’t materialize. Only one participant advocated a larger move, and some who previously leaned that way did not repeat the call. Translation: the cutting cycle stays measured, not a scramble.

Why the market reaction looked split

Equities: Knee-jerk rally on the cut and an extra implied 2025 reduction, then consolidation as the dots for 2026 signalled fewer cuts than futures had priced. The medium-term equity bid survives because easing is still the base case.

Rates and USD: Fewer cuts in the projections nudged yields higher and the dollar off the lows—a reminder that path and pace matter more than destination.

Gold: The non-yielding haven thrives when the market grows confident in lower real rates and questions Fed independence down the road. The trend remains up, even if overbought pockets invite tactical pullbacks.

The “two Feds” narrative traders are discounting

Into 2026, markets are starting to handicap a post-Powell regime that could prove more politically attuned and dovish than today’s median dot suggests. That creates a distribution of outcomes: the current Fed guiding toward a return to something near neutral versus a successor more willing to press policy into outright stimulatory territory. Equities are leaning into that upside tail; rates are hedging the inflation risk that such a pivot could unleash.

Inflation risk isn’t off the board

Cutting too fast while inflation hovers in the high 2% and possibly 3% keeps curve steepening in play and supports the dollar on squeezes. The Fed’s “risk-management” language—tapping the accelerator, not flooring it—aims to avoid re-igniting price pressures. Near-term data (e.g., PCE) can still wrong-foot the most dovish hopes, but the broader setup (slower consumption, softer labour signals) argues for gradual easing rather than a rush.

Fiscal and geopolitics: background bid/drag

US fiscal noise (shutdown chatter, deficit optics) remains a structural headwind for the dollar’s narrative even if it delivers episodic USD squeezes. US–China headlines (e.g., speculative high-level visits) lacked follow-through to start the week; without substance, Asia equities didn’t chase. Going forward, the setup looks structurally cautious on USD with easing ahead and fiscal drag, but tactical squeezes are likely given positioning and dot-plot surprises.

Bottom line

The Fed cut, signalled more to come, and kept the door open to a slower path than markets wanted. That mix sustains the risk-on drift while preserving two-way volatility in rates and FX. For traders, it’s still a dips-and-fades market: respect the dovish direction of travel but watch out for risk-off surprises if the data disappoints.