Market Wire: Fed Delivers Quarter-Point Cut, Arguably Adopts Less-Dovish Tone

As had been widely anticipated, the Federal Reserve cut its benchmark borrowing rate by a quarter percentage point this afternoon, and cautious language in the statement points to a more gradual pace of easing ahead.

The Federal Open Market Committee voted unanimously to lower the target range for the federal funds rate to 4.5 to 4.75 percent, with Governor Bowman moving back into line with the consensus after dissenting in favour of a similar-sized move in September.

In the statement setting out the decision, officials noted “economic activity has continued to expand at a solid pace,” before saying “Since earlier in the year, labour market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated”. “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate”.

We would consider the statement slightly less dovish than the previous iteration - a sentence that previously referred to “greater confidence” in declining inflation was removed, and the “roughly balanced” language gives policymakers room to pause at future meetings - but the underlying decision was widely anticipated in financial markets, and the impact thus far has been minimal. Front-end Treasury yields are almost unchanged, and the dollar remains on the defensive as currency markets continue to unwind yesterday’s knee-jerk moves.

Price action could intensify in the coming minutes as Jerome Powell faces off with reporters during the post-decision press conference, but we doubt it. The chair is likely to maintain a neutral view on incoming economic data, maintaining as much optionality as possible prior to Donald Trump’s return to the White House.

Questions on the Fed’s independence and Powell’s role could be interesting, especially after CNN cited a “senior advisor” to the president-elect as saying Trump would likely allow Federal Reserve Chair Jerome Powell to serve out the remainder of his term in an article published just after noon eastern time, but we suspect this comes as no surprise in markets. To fire Powell, the president would need to prove that he had demonstrated “inefficiency, neglect of duty, or malfeasance in office” to the satisfaction of the courts - and with the Fed already cutting rates anyway, we don’t imagine that he will feel the need to override policy decisions.

To watch the press conference, click here