Morning Note: Our view on the US rate cut.
US Interest Rate Decision
Last night the Federal Reserve delivered its first interest rate cut since December 2024, reducing the federal funds target range by 25 basis points to 4.00-4.25%. The decision was taken against a backdrop of weakening labour market data, inflation that has remained stubbornly above the 2% target, and uncertainty about the economic outlook. In its statement, the Federal Open Market Committee noted that economic activity had moderated through the year, job gains had slowed, and unemployment had edged higher, even if it remained historically low. Inflation had picked up in recent months and was still elevated. Against this balance of risks, the Committee judged that a modest reduction in rates was warranted. Eleven of the twelve voting members supported the cut, with Governor Stephen Miran dissenting in favour of a larger half-point move. The Fed also signalled that quantitative tightening would continue, with the central bank reducing its holdings of Treasury and mortgage-backed securities despite the adjustment in the policy rate.
At the subsequent press conference, Chair Jerome Powell described the move as a “risk management cut”. He stressed that the Fed was not embarking on an aggressive easing cycle but was acting pre-emptively to prevent weakness in the labour market from becoming entrenched. Powell acknowledged that payroll data had been revised down significantly in recent months, revealing that job growth was materially weaker than previously thought. While the unemployment rate remained low by historical standards, he argued that downside risks to employment had increased. At the same time, he underlined the Fed’s continuing concern about inflation, which was being driven in part by tariffs and supply disruptions. These may represent one-off adjustments, but Powell admitted there was a risk that they could persist and become embedded in expectations. He reiterated that the Committee would proceed on a meeting-by-meeting basis, with no preset course for further cuts, and emphasised the uncertainty surrounding forecasts. While the Fed’s updated projections suggested that most policymakers anticipated one or two additional reductions by the end of the year, Powell noted that there was no consensus and that outcomes would depend on incoming data.
Financial markets had largely anticipated the quarter-point cut, but the reaction was uneven. Equity markets rallied initially before giving back gains during Powell’s press conference, reflecting investor sensitivity to his cautious tone. Treasury yields moved modestly higher, with the ten-year rising to just above 4.0%, as markets reassessed the persistence of inflation and the limited scope for rapid easing. The dollar strengthened slightly, as the decision was seen as measured rather than the start of a deep cutting cycle, while gold prices rose on concerns about the inflation outlook and demand for safe-haven assets.
Overall, the September decision marks a careful shift in policy. The Fed has begun to lower rates in recognition of softening growth and labour market conditions, but Powell’s remarks made clear that inflation remains a pressing concern and that the Committee is not prepared to cut aggressively. Markets are now caught between the possibility of modest easing and the persistence of structural inflationary pressures. For investors, the message is that the Fed has blinked, but only slightly, and the path ahead will remain narrow and highly data-dependent.
Other Market News
In Asia this morning, equity markets were mixed: Nikkei 225 (+1.2%); Hang Seng (-1.3%); Shanghai Composite (-1.2%). Nvidia was the notable Mag 7 laggard following reports that China ordered its top tech firms to stop buying the company’s AI chips.
The FTSE 100 is currently little changed at 9,216, while Sterling trades at $1.3625 and €1.1520. The Bank of England is expected to keep rates on hold at 4%, and elevated inflation may dampen hopes a reduction this year. Policymakers are also seen reining in quantitative tightening (QT) amid concerns that gilt sales are worsening volatility. The announcement is at noon.
The UK has secured £150bn in inward investment from US companies as part of President Trump’s state visit; Blackstone has pledged to invest a further £90bn in the country in addition to the £10bn that it has already announced for data centre development.
Brent Crude trades at $67.30 a barrel. The IEA said that Saudi Arabia and Iraq will be able to redirect a combined 720,000 barrels a day from power generation to exports by 2035. Gold trades at $3,660 an ounce.
Meta unveiled its $799 Ray-Ban Display smart glasses with a built-in screen. The glasses can display text messages, turn-by-turn directions in maps, and visual results from queries to Meta’s AI service. Shares in Ray-Ban owner EssilorLuxottica continue to move higher.
Source: Bloomberg
