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The Fed lowered policy rates yesterday from 4.5%-4.75% to 4.25-4.5%, a level chair Powell said is still “meaningfully restrictive”. The decision was expected but not unanimous. Cleveland Fed Hammack voted to keep rates steady which given the circumstances had a lot to say for. The economy is doing fine with GDP forecasts left unchanged at a very decent 1.9-2.1% over the policy horizon. PCE inflation was revised higher to 2.5% from 2.1% in 2025 before easing towards the 2% goal by 2027. Core PCE faced a similar upward adjustment. The FOMC moved from seeing risks to both inflation gauges as broadly balanced in September to skewed to the upside. In the same vein, uncertainty about both was now much higher. Asked why the Fed did cut, Powell noted the labour market is still cooling, be it gradually, while the inflation story was “broadly on track”. The language in the statement on future cuts changed in a hawkish way though with the bold part being the addition: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” Powell said this signals the Fed is at or near a point to slow the pace of further adjustments. He added that after having cut a cumulative 100 bps the Fed is now “significantly closer to neutral”, warranting a cautious stance. In the updated dot plot, the median rate forecast shifted up by 50 bps over the horizon, meaning next year is now showing two 25 bps rate cuts instead of four. In addition, the policy rate is expected to remain above an upwardly revised neutral rate (to 3%) in 2025-2027. It’s higher for longer all over again. Powell at the very end of the presser, while labeling it as not a likely outcome, did not even want to rule out a rate hike next year. US yields surged between 8.8 (30-yr) and 14.1 (5-yr) bps on the Fed’s hawkish pivot and may have more room to run in the current momentum. US money markets not even fully price in two cuts next year. The dollar closed at the highest level in two years against the euro. EUR/USD finished at 1.0353 compared to the 1.0491 open. Critical support at 1.0335 (November intraday correction low) is at risk. The trade-weighted index topped 108 for the first time since November 2022.

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Multiple central banks convene today. We already had Japan (see below). Next up is Sweden, Norway and the Czech Republic. In core markets, attention shifts from the Fed to the Bank of England. The intermediate meeting is without updated forecasts though. The status quo at 4.75% is all but certain. Governor Bailey’s guidance for 2025 is way more interesting. This week’s stronger-than-expected wage growth and stubborn inflation pressures (core, services) leave the central bank little wiggle room. Money markets barely price in two cuts next year. It’s keeping sterling locked near recent highs against the euro around EUR/GBP 0.823. If Bailey is only a fraction as hawkish as Powell yesterday, a test of EUR/GBP 0.8203 is on the cards.

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The Bank of Japan kept rates steady at 0.25% this morning. The decision was widely expected after the likes of Reuters and Bloomberg cited sources that the central bank was leaning towards the status quo. Tamura dissented and voted for a hike as the economy and prices were moving as expected and inflation risks were increasing. With the economy “likely to keep growing at a pace above its potential growth rate” and inflation expected to be sustainably at target as projected in the October outlook, a third hike is coming nevertheless. Governor Ueda during the presser confirmed this but said they wanted more information on wage hikes first. The lack thereof today was the reason why they held rates. Since these wage negotiations (shunto) only take place in February/March, a January rate hike suddenly is being questioned as well. The yen, which was already pressured by a strong USD, extends losses on Ueda’s comments. USD/JPY shoots higher to 156.3. Verbal interventions are probably incoming.

New Zealand GDP contracted a much bigger than expected 1% Q/Q in the third quarter this year. It followed a downwardly revised 1.1% (from -0.2%) in Q2, meaning the country technically entered a recession. GDP was 1.5% smaller than in 2024Q3. Part of the steep decline was statistically inspired with adjustments to earlier readings having caused a higher comparison base. Details do show a weak performance across the board from household consumption (-0.3% Q/Q), capital formation (-2.9%) and government consumption (-1.9%). Exports (-2.1%) dropped more than imports (-0.4%) did. The kiwi dollar tumbled on the release with the dollar compounding the downleg in NZD/USD. The pair closed at 0.562. Swap rates slipped 5 bps at the front end of the curve.