Fed’s Move and Market Outlook

The Federal Reserve delivered its first rate cut of the year on Wednesday, lowering its benchmark rate by 25 basis points to a range of 4.00% to 4.25%. The decision, widely expected by markets, came as officials projected two more cuts before year-end. However, the move was not unanimous, with new Governor Stephen Miran dissenting in favor of a larger 50-basis-point reduction. Fed Chair Jerome Powell described the decision as a “risk-management cut,” noting that job growth has slowed and unemployment has inched higher, though still at low levels.

 

Other central banks moved in different directions. The Bank of Canada also cut rates by 25 basis points, bringing its policy rate to a three-year low of 2.5%. Meanwhile, the People’s Bank of China held steady, and the Hong Kong Monetary Authority had no choice but to follow the Fed. Markets are now turning to the Bank of England, expected to keep rates unchanged at 4%, and the Bank of Japan, which will announce its policy on Friday.

Stock markets responded with mixed signals. After losses on Wall Street, Asian investors bought the dip, pushing futures higher. The S&P 500 e-minis rose 0.5% and Nasdaq futures 0.7%, while Europe tracked the positive tone with the DAX up 0.7% and FTSE futures higher by 0.2%. Japan’s Nikkei gained 1.2%, alongside solid moves in South Korea and Taiwan. Still, Australian and New Zealand markets underperformed after weak economic and labor data.

 

Bond markets also rallied, with the 10-year U.S. Treasury yield slipping to 4.068% from 4.076%. In commodities, gold swung between gains and losses after hitting a record $3,659 per ounce earlier in the week, while Brent crude eased 0.2% to $67.84. Meanwhile, shares of Australian gas producer Santos dropped sharply after Abu Dhabi’s ADNOC scrapped its $18.7 billion takeover bid.

 

Currency markets saw volatile swings. The U.S. Dollar Index initially dropped to 96.224 — its lowest level since February 2022 — before recovering to 97.024 on Thursday. The euro briefly surged to $1.1918, its strongest since June 2021, before slipping back to $1.1795. Sterling also retraced gains, last at $1.3606 after hitting $1.3726. The Chinese yuan firmed slightly at 7.1060 as Beijing left policy rates unchanged.

 

While the Fed’s cut was largely priced in, Powell’s cautious tone tempered hopes for aggressive easing. He stressed that not all policymakers favored larger moves and reaffirmed the central bank’s independence amid political pressure. Traders, however, are now assigning an 87.7% probability of another 25-basis-point cut in October, up from 74.3% before Wednesday’s meeting, according to CME’s FedWatch tool.

 

For investors, the Fed’s return to easing offers opportunities but also calls for caution. Equities and risk assets may benefit from lower borrowing costs, especially in the short term, but Powell’s warning against rushing into deeper cuts could limit upside momentum. A balanced strategy might involve selective exposure to U.S. equities and gold, while keeping an eye on bond yields and currency swings. Traders should also monitor upcoming central bank decisions, as divergence in monetary policy between the Fed, BoE, and BoJ may fuel further volatility in FX markets.

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