Powell Taps The Brakes In The Fog, But Traders Keep Hitting The Gas

Core Viewpoint - Fed Chair Jerome Powell has pushed back against market expectations for a December rate cut, emphasizing caution due to low visibility in economic indicators, yet market sentiment remains optimistic about a potential cut by year-end [1][3]. Market Expectations - As of Thursday morning, traders assigned a 69% chance of a 25-basis-point cut at the December 10 meeting, with a prediction market indicating even higher odds at 74% [2]. Fed's Position - Powell stated that a further reduction in the policy rate at the December meeting is not guaranteed, highlighting a divided Federal Open Market Committee (FOMC) on future actions [3][4]. - Some FOMC members are concerned about inflation risks, while others focus on labor market issues, indicating differing economic forecasts and risk tolerances [4]. Economic Indicators - The ongoing government shutdown has delayed key macroeconomic indicators, which may influence the Fed's decision-making process [5]. - Powell suggested that higher uncertainty could lead to a pause in rate cuts, likening the situation to driving in fog where one must slow down [5]. Analyst Reactions - Goldman Sachs economist David Mericle described Powell's tone as unexpectedly hawkish, noting that the Fed Chair did not reference the September dot plot that suggested a likely cut [6]. - Despite this, Goldman Sachs maintains that a December cut is probable due to cooling labor market conditions and inflation nearing the 2% target [6][7]. - Bank of America's Aditya Bhave expressed skepticism about another rate cut, suggesting that the December decision could be contentious [8]. Potential Dissent - If the Fed opts for another cut, more hawkish officials may dissent, while a decision to hold rates steady could lead to dissent from more dovish members [9]. Market Reactions - Following Powell's remarks, the 10-year Treasury yield rose above 4.00%, indicating skepticism among bond traders regarding further easing [10]. - Despite negative reactions to Powell's comments, the S&P 500 closed lower after reaching record highs, with some analysts maintaining a bullish outlook on future market support from the Fed [11].