Fed moves to moderate pace of easing
In contrast to the aggressive half-point cut in September, the Fed has opted for a 25 basis point cut this month. This expected reduction is intended to balance inflation control with support for the labor market. Although the September decision was divided, this time the Federal Open Market Committee (FOMC) reached consensus, indicating the Fed had unanimous confidence in a more moderate approach. The statement accompanying the rate decision indicated “balanced” risks to inflation and employment, a shift from previous FOMC concerns that emphasized inflation.
Concerns about the labor market shape the Fed’s strategy
Despite the Fed’s cooling policy, economic indicators are still strong. US GDP grew at an annualized rate of 2.8% in the third quarter, while the fourth quarter was slightly lower at 2.4%, according to the Atlanta Fed. Employment data shows a slight weakening, with nonfarm payrolls increasing by just 12,000 in October, partly due to external disruptions such as recent storms and labor strikes. The Fed’s recent statements underscore a strategy to avoid excessive labor market tightness, which could prolong inflationary pressures. Fed Chairman Jerome Powell hinted at “recalibrating” policy to support growth without worsening inflation.
Market expectations and political factors in focus
The economic uncertainties extend beyond traditional indicators. The recent US presidential elections have once again focused attention on the potential consequences of newly elected President Donald Trump’s economic agenda, which could influence the Fed’s policy trajectory. Proposed tariffs and immigration reform could pose longer-term inflation risks, complicating the Fed’s “soft landing” goals for the economy. If Trump’s policies accelerate growth without stoking inflation, the Fed may hesitate to ease further in 2024.
Treasury yields respond differently to Fed moves
Despite rate cuts, Treasury yields have risen since the Fed’s move in September, with the 10-year yield rising to nearly 6.8%. Higher yields on longer-dated Treasuries reflect investor skepticism about the Fed’s easing policy, especially as core inflation remains stubbornly around 2.7%. Rising mortgage rates, now at 6.8% for 30-year loans, are a further signal that markets may be betting on stronger growth and continued inflationary pressures, testing the Fed’s intended easing effects .
Market Forecast: Cautious Bullishness for the Dollar
With another potential quarter-point cut expected in December, the DXY is likely to remain supportive in the near term, especially if inflation expectations remain anchored. The Fed’s caution suggests it could pause after December to assess the impact of easing measures, likely strengthening the dollar’s appeal as other central banks could also change their policy stances. For traders, DXY could maintain moderate bullish momentum if economic growth continues and inflation gradually stabilizes.