The Federal Reserve lowered interest rates by 25bp to 4.50 percent, giving the financial markets exactly what they wanted and nothing more. The FOMC statement remained virtually unchanged, signaling that any further rate cuts by the Federal Reserve will be gradual. Interestingly enough, the Fed indicated that the upside risks to inflation roughly balance the downside risks to growth. In other words, their monetary policy bias is neutral with a tinge of hawkishness.
There was one dissenting vote by Hoenig, who favored leaving interest rates unchanged. The last time a rate decision was not unanimous was in December 2006 and that did little to foreshadow further moves to come, so not much weight needs to be placed on this piece of news. Even though third quarter growth was strong, the Fed is still worried about a potential slowdown in the near term. As a result, they have decided to take another proactive measure to prevent a further slowdown in the US economy. It seems today’s decision has been obligatory since the consequences of not easing and disappointing the markets would have been too severe. For economic bears, the Fed failed to deliver. As for future interest rate cuts, the Fed did not commit to anything, but we still expect at least another 50bp of easing before this rate cycle is over. Right now, the chance of a December rate cut is fifty-fifty. Over the next three to six months we are still looking for the EURUSD to rise above 1.50 and the AUDUSD to hit parity. BUT non-farm payrolls is the next major event risk. Given the sharp rise in the ADP survey, we could see a short term bounce in the dollar as traders adjust positions in favor of a stronger NFP number.