As expected, the Federal Reserve trimmed its target rate by a quarter point on Wednesday, bringing it down to a range of 3.75%–4.00%. It is the second rate cut this year after September’s move and as Chairman Powell hinted, probably the last one for a while. A third cut by the end of 2025? Do not hold your breath.
“There were strongly differing views about how to proceed at the next policy meeting in December,” Powell said during the press conference. “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.”
Well, the Fed is keeping its options open which is a polite way of saying that they are not sure yet.
The bond market reacted in its usual dramatic fashion. Yields jumped as traders rushed to unwind bets on more cuts. The 2-year yield, which tends to get jittery faster than a day trader on five espressos shot up to 3.60%, its highest in three weeks.
Still, futures markets are clinging to some hope. They are pricing in about a 72% chance of another rate cut in December. That leaves just enough uncertainty for everyone to argue about it until then which, to be fair, is what keeps financial media interesting.
Powell also pointed out that the Fed’s next moves will depend heavily on data that is currently delayed because of the government shutdown. “What do you do if you are driving in the fog? You slow down,” he said. Fair point. Though in today’s markets, it sometimes feels like everyone else is still flooring it.
So, where does that leave us? Despite the Fed’s cautious tone and a few clouds of uncertainty, I remain bullish on the broader US markets. Powell may be driving carefully through the fog, but I’m betting the road still leads uphill, just with a few more bumps and sharper turns along the way.
