Fed surprises with dovish tone, sending Dow to all-time high

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The Fed, yesterday, held the policy rate steady at 5.25-5.5%, which was largely expected. However, it did surprise with a dovish tone maintaining that growth "has slowed" and "inflation has eased." The dot plot showed an extra cut for 2024, now numbering 75bps as opposed to 50bps as signalled in the September update. Moreover, the final hike as per September was omitted so the Fed funds rate is now 4.6% for year-end 2024 and not 5.1% as previous.

The 10-year real rate dropped on the news taking the dollar with it. This is not a surprise given the close positive correlation between the two (83% on a weekly basis).

It seems that the market is pricing in immaculate disinflation i.e., a slowdown in price inflation without a a significant spike in unemployment. Equites popped on the news as Fed Chair Powell declined to push back on expectations that the first rate cute will be in March next year. Most economists and Fed watchers were expecting Powell to quash any hopes of policy easing in early 2024. However, his remarks surprised, and the Dow Jones Industrial Average closed at a record high, soaring 500 points.

The Fed's success is largely due to more goods and services being available. This has balanced the economy and slowed inflation without hurting demand. Supply chain issues are getting better, and more people are working, partly helped by increased immigration after Covid. This has fixed supply problems, so inflation is slowing down, even though wages are going up and people are still spending.

Trade the News: View our Economic Calendar

The big question is whether this trend will keep going. Prices are not going up as fast, and some experts think PCE, the Fed's favourite measure, will moderate further when the November data comes out next week. However, it has not reached target yet, and the Fed isn't sure enough that inflation is going down to start reducing interest rates.

The Fed is still data dependent and will need to balance its approach to monetary policy so that it doesn't loosen conditions too fast and too soon.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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