The Fed’s rate cut yesterday leaves the rate at its lowest rate since September 2022. The decision was widely expected and carried in a 9-3 vote. This marked the Fed’s third and final cut this year.
Three FOMC Members Dissent from Rate Decision
Historically, Fed rate decisions have been unanimous but that has changed, as recent meetings have been marked by a split vote. This was again the case at Wednesday’s meeting. Interestingly, there was dissent in opposite directions. Fed members Goolsbee and Schmid voted to maintain rates, while Fed member Miran wanted to cut rates by 50 basis points.
Fed Sends Hawkish Message
The Fed decision to trim rates was widely expected, but the rate statement and the follow-up press conference both suggested that the Fed will proceed with caution regarding further cuts in 2026. The statement noted that the Fed will carefully consider the “extent and timing” of additional moves, language which was not used in the previous statement. This was a hint that more rate cuts are on the table.
In his press conference, Chairman Powell noted that the risk of rising inflation and higher unemployment remain, and this had resulted in a “very challenging situation”. The unemployment rate ticked higher in September, up from 4.3% to 4.4%, while inflation hit 3% in September for the first time since January.
This has created a dilemma for Powell, as the Fed tries to reach a balance between full employment and stable inflation. The risk of higher inflation and a weaker employment outlook makes it difficult for the Fed to determine in which direction to move with rates. If the Fed lowers rates further to boost the labor market, it would likely raise inflation, leaving the Fed stuck between a rock and a hard place.
US Dollar Slips, Stock Market Higher after Rate Decision
The US Dollar posted strong gains on Wednesday. The EUR/USD currency pair fell 0.43% on the day, while GBP/USD gained 0.59%. The US Dollar is showing limited movement against the major currencies on Thursday.
US stock indices posted gains on Wednesday in response to the Fed’s rate decision.
The S&P 500 Index rose 46b points (0.67%) on Wednesday and closed at 6,886.
The Nasdaq 100 Index rose 77 points (0.33%) and closed at 23,654.
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