The Fed cuts by 25 basis points and guides toward more cuts as balance of risks shift

The Fed cut rates as expected – by 25 basis points. But the devil, as expected, was in the details.

FOMC votes 8-1 for a 25 point cut, confounds the markets with updated forecasts

Judging by the mixed reaction in markets, the details confused market participants. The FOMC voted 8-1 to lower rates by 25 basis points. The one dissenter was Trump’s handpicked, temporary voter, Stephen Miran, who advocated for a 50 basis point move. The central bank’s updated ‘Summary of Economic Projections’ were arguably muddy. Growth forecasts were upgraded, and despite recent weakness in the labour market, the unemployment rate projection for 2026 was lowered – albeit after a rise to 4.5% by the end of the year. Core PCE inflation forecasts for this year were unchanged for 2025. But the projection for 2026 was lifted, with inflation not expected to return to target until 2028 now. 

(Source: US Federal Reserve)

The updated “dot plots” point to a “low conviction Fed”

Many commentators have suggested that the story the forecasts tell is highly convoluted. They are calling it a “low conviction Fed” as portrayed by the wide distribution of estimates for the Federal Funds Rate in the so-called dot-plots. Stephen Miran (presumably, given his previous public comments and the fact he is a de facto representative of the White House) projected interest rates finishing the year below 3%. That fact is giving rise to a “two Fed” scenario: one that reflects policy intentions now and into early next year, and one that reflects a policy bias similar to Stephen Miran when US President Donald Trump selects his new Chairperson. Meanwhile, some members placed their dot above the current Federal Funds Rate in this SEP. Superficially this suggests some favour a hike before the end of the year. More realistically it indicates that some members believe the appropriate policy rate ought to be higher right now.

(Source: US Federal Reserve)

US indices go on a round drip, gold dips and Dollar bounces 

A play by play of the price action in response to the FOMC looked somewhat like this: stocks and gold rallied to test record highs and the US Dollar dropped as the decision was published and the markets reacted to a median dot that implied an additional cut this year. However, the moves were swiftly unwound, sending stocks well into negative territory, probably owing to the fact that the trough rate projected by the FOMC is above where the markets had priced-in prior to the decision. Ultimately, Wall Street clawed back the losses throughout the press conference, with a noteworthy pop in indices as Chairperson Powell outlined the case for a shifting balance of risks that warrants careful attention to the labour market and patience in returning inflation to target.

When the dust settled, Wall Street was essentially flat for the session. A slight rotation into cyclicals and out of growthy tech pushed the Dow into positive territory and the NASDAQ into negative territory. However, most of those moves had already transpired by the time the FOMC decision was released. The US Dollar regained the losses that helped the likes of the Euro and the Australian Dollar briefly top 1.19 and 0.6700 briefly. Gold prices fell after briefly pushing to fresh record highs.