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The Fed restarts the rate cut cycle! Investment banks expect series of interest rate cuts to last until next X-month
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Market Analysis]: The Federal Reserve restarts its interest rate cut cycle! Investment banks expect a series of interest rate cuts to last until next X month." Hope it will be helpful to you! The original content is as follows:
Asian market market
After the Federal Reserve's interest rate resolution was announced, the US dollar index plunged in the short term, but at a subsequent press conference, Powell said this was a "risk management" interest rate cut, and the US dollar index rebounded and recovered the US dollar mark. As of now, the US dollar is priced at 97.13.
Overview of fundamentals of the foreign exchange market
The Federal Reserve September meeting
①Announced a 25 basis point interest rate cut, and only Milan voted against it and supported a 50 basis point interest rate cut.
②Powell said that the labor market risks are biased toward a downward trend, and this rate cut can be understood as a risk-management rate cut; the 50 basis point decline has not been widely supported; and reiterated the temporary impact of tariffs on inflation.
③ The median value of the dot map implies that there will be a cumulative interest rate cut of three times this year (75 basis points) and a rate cut of one next year. Milan hopes to cut interest rates by 150 basis points this year.
④Powell continued to express his concerns about stagflation.
The EU announces sanctions against Israel.
Saudi and Pakistan sign a joint defense agreement.
Many Middle East Gulf countries followed the Federal Reserve's interest rate cut.
U.S. Treasury Secretary Bescent Bescent once listed two properties as "main residences" at the same time, which is consistent with the reasons for Cook's removal.
The Bank of Canada lowered the benchmark interest rate by 25 basis points to 2.50%, in line with market expectations and removed forward-looking guidance for interest rate cuts from its policy statement.
Summary of institutional views
Danske Bank: The gradual interest rate cut strategy may gradually gain momentum, and it is recommended to plan the short-term interest rate rise in the US dollar
The consensus of this Federal Reserve's interest rate cut resolution exceeded expectations - except for Milan's 50 basis points interest rate cut, all voting xmserving.committee members support the 25 basis point adjustment. But the latest economic forecast summary reveals deeper differences: one participant (an Unified xmserving.committee member) believes that interest rates should not be cut this time and within the year; nine people support interest rate cuts at most; nine people demand interest rate cuts for the remaining meetings this year; another person (most likely Milan) requests an additional interest rate cut of 125 basis points. This means that the approval rating for the two more interest rate cuts this year is only passed with its weakest advantage. This delicate balance means that the data's slightly exceeding expectations may significantly change the interest rate outlook, and the "Eagle Dove" power xmserving.comparison may reverse quickly. We currently maintain our previous expectations and still expect the Federal Reserve to cut interest rates only once this year (December), and will cut interest rates three times in 2026, once a quarter.
In other words, we tend toward a hawkish gradual rate cut strategy, as financial conditions have been significantly loose, and improvements in credit growth and balanced corporate order inventory do not indicate an imminent economic slowdown. Tariff cost transmission is still in its early stages, and it is difficult to judge the sustainability of price pressure when consumer inflation expectations are high. Even the worrying labor market is relatively balanced after considering a significant slowdown in supply growth—in Powell’s words: “The economy is not in trouble.”
We insist that the premise of staying steady at the next meeting is that the labor data remained stable in early October, but it is still recommended to plan for the short-term interest rate of the US dollar to rise. Overnight the euro returns to pre-conference levels, and we maintain our 12-month target of 1.23.
Morday Morgan Stanley: The Federal Reserve has not dispelled its doubts, and expected that the Federal Reserve still has X basis points to cut interest rates at the beginning of next year.
Powell's remarks are basically the same as the tone of the policy statement: he is more worried about the downward risks of employment than the upward risks of inflation. In order to stabilize the labor market, the Federal Reserve is more tolerant of inflation above its target. The right policy now is to adopt neutral policies to help support the labor market. While future data remains important, we believe that the change in tone is largely a readjustment of policy stance. The Fed appears willing to lower policy rates by the end of the year before reevaluating it. Powell made no remarks to dispel our speculation that the Fed is expected to cut policy interest rates again at its October meeting.
Many questions remain about the threat to the Fed’s independence and credibility of inflation targets. We are not satisfied with the answer to the Fed’s independence, but this is mainly because the Fed tends to take a cautious stance on political development. We think this is understandable. On inflation, we understand that there are criticisms of the Fed for taking risks with its credibility against inflation again, but the Fed has no choice at the moment. As Powell pointed out, its tools are most effective in mitigating the impact on aggregate demand. The total supply shock presents challenges and unsatisfactory trade-offs.
In general, the Fed believes thatA moderately restricted policy stance is inconsistent with a shift in the risk balance toward a weak labor market. The short-term goal appears to be to lower policy rates to closer to neutral, with the dot chart showing a 75 basis point cut this year. We maintain our expectations of a 100 basis point cut rate by January next year (including 25 basis points overnight) and believe the Fed has begun to moderately adjust its policy stance.
Goldman Sachs Analysis: Powell's speech is balanced than the policy statement, revealing this deep meaning
Powell's press conference is obviously more balanced than the revisions to the statement. I think this is attributed to two points. First, Powell believes that this meeting is a turning point for the Fed, xmserving.compared to the period when inflation dominated interest rate decisions in the past few years. Today's meeting is about employment, and the amendment to the statement clarifies that. This is not new to the market, but it is new to the Fed and explains some of the key points in the statement's revisions.
Secondly, Powell's initial explanation of the rate cut was somewhat vague, saying the rate cut provided some guarantees for the economy and helped ensure better results of economic activity. This is done in the context of explaining the changes in SEP, which is important. He later described this as a first step and pointed out the process of market pricing and returning to neutrality.
Overall, the risks are new, but not serious, that the Fed needs to consider taking over aggressive policy measures, and will only do so if the policy is clearly in the wrong direction. The Fed's intention is that the labor market has become the main driving force. The market has turned in that direction, at least when the jobs report was released in July, so the overnight Fed meeting showed that it is not just the “risk rise” itself to push the Fed to take faster or deeper steps.
Mitsubishi UF: The Fed has not entered a sprint mode for interest rate cuts
Mitsubishi UF's US macro strategy head George Goncalves said that the Fed's decision was the most dovish statement the Fed has made, and they added another rate cut this year in the dot chart expectations. However, it feels like the Fed has not entered the sprint mode of rate cuts, they have just restarted the rate cuts because they admit that the job market is not as good as they expected. This is also the reason why risky assets respond in a dull manner. The Fed may drop by 25 basis points in October and December, while a 50 basis point cut is not necessarily positive for credit.
The above content is all about "[XM Foreign Exchange Market Analysis]: The Federal Reserve restarts the interest rate cut cycle! Investment banks expect a series of interest rate cuts to last until next X month". It was carefully xmserving.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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