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Beyond the “buy the rumour, sell the fact” reaction after the FOMC decision, the US dollar’s medium-term tone has weakened after the Fed affirmed a deeper and faster rate-cutting trajectory. The Fed described its decision to lower the Fed Funds Rate range by 50 bps to 4.75-5.00% as a recalibration towards a more neutral stance. Except for a dissenting vote to cut by 25 bps, the committee’s decision reflected confidence in inflation coming down to 2% on a sustainable basis, allowing a pre-emptive tilt towards maintaining the strength of the US economy and labor market. The larger cut probably compensated for last month’s downward revision by the Bureau of Labor Statistics in nonfarm payrolls by 818k jobs for the 12 months ending March 2024. Powell considered an unemployment rate in the low fours to be a good labour market. Per the Summary of Economic Projections, the Fed has lowered the appropriate policy rate path to 4.4% from 5.1% for 4Q24 and to 3.4% from 4.1% for 4Q25 to cap the jobless rate at a higher 4.4% through 2025.
Today, we cannot rule out the Bank of England surprising with a second 25 bps cut in the bank rate to 4.75% vs. the consensus for a hold decision. Yesterday, Bank Indonesia surprised with a 25 bps rate cut to 6.00% before the FOMC meeting vs. last month’s guidance for a later move in 4Q24. In its Summary of Deliberations released overnight, the Bank of Canada was divided between upsizing rate cuts on weaknesses in the economy and labour market and maintaining the pace until it was ready to declare victory on inflation. BOC has delivered three 25 bps cuts before the Fed’s first 50 bps reduction yesterday. The Swiss National Bank will likely deliver a third 25 bps cut to 1.00% on September 26 after acknowledging the pressures of the CHF’s strength on Swiss industries. Japan Finance Minister Shunichi Suzuki warned that rapid FX moves (JPY appreciation this time) were undesirable before tomorrow’s Bank of Japan meeting. The OIS market is pricing in a slight chance of a December hike after the second hike on July 31.
Interestingly, other central banks and currencies now face a different challenge compared to the first half of the year. As the Fed grapples with concerns about acting too late in its policy adjustments, central banks in export-reliant economies may have to consider interventions or adopt more accommodative policy stances to counteract the impact from currency appreciation driven by a weakening USD. After contending with significant depreciation pressures over the past two years, these central banks should also find relief in the Fed’s shift from reining in high inflation to prioritizing support for the economy and jobs.
Quote of the day
“Every sunset is an opportunity to reset. Every sunrise begins with new eyes.”
Richie Norton
September 19 in history
New Zealand became the first country to grant all women the right to vote in 1893.
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