Fed cuts rates and will finish QT, no December cut guarantee

Fed cuts rates, ends QT but keeps December open

The Federal Reserve lowered its policy rate by 25 basis points to a target range of 3.75–4.00 per cent. The FOMC voted 10–2 in favour of the 25bp reduction; the two dissents reflected divergent views on the appropriate pace of easing (one participant preferred a larger 50bp cut, another preferred no cut). The Committee also announced that the balance-sheet run-off will cease on 1 December and that Treasuries maturing thereafter will be rolled over to maintain the Fed’s holdings.

The following points highlight the most relevant comments from Chairman Jerome Powell's recent press conference:

• An interest rate cut is not assured for the December meeting, partly due to the potential, though expected to be minimal, impact of tariffs on inflation. Furthermore, the ongoing government shutdown could delay the release of official employment data, which may affect the central bank's economic outlook.
• The central bank is contending with a difficult economic context, marked by elevated inflation rates—approaching 3%—and weakness in new hiring. Consequently, future decisions will be based strictly on incoming economic data.
• FOMC members hold differing perspectives and varied levels of risk aversion, implying that future votes could change depending on their evolving economic outlooks.
• The labour market weakness can be explained by several factors, with one of the most relevant being the immigration policies of the current US administration.
• The Federal Reserve observes healthy consumption and a strong GDP growth rate, which provides support for pausing monetary policy easing, if necessary, and for making decisions based on updated economic data.
• The central bank does not perceive significant market risk of a financial bubble stemming from technology companies' valuations, noting that current fundamentals are strong, unlike in 2000 when companies generally lacked healthy profits and cash flows.

The CME Group’s FedWatch Tool saw the probability of a 25bp cut for the December meeting fall markedly in the immediate aftermath of the press conference (reported movements in market pricing shifted from c. 90 per cent to c. 67 per cent). 

Market reaction was mixed. Major US equity indices were broadly unchanged on average (+0.09 per cent), the dollar index (DXY) strengthened by c. 0.42 per cent to 99.13 points, 10-year Treasury yields rose to c. 4.07 per cent, and gold eased by c. 0.44 per cent to about $3,964 per ounce.

Bank of Canada trims rates amid weaker labour market

In a separate decision, the Bank of Canada cut its policy rate by 25 basis points to 2.25 per cent. Although headline inflation in Canada is close to the bank’s 2 per cent objective (current headline c. 2.4 per cent), the central bank is affected for a deterioration in labour-market conditions — with unemployment rising to its highest level in three years — as a reason for easing. The announcement contributed to heightened volatility in the Canadian dollar versus US dollar as markets digested near-simultaneous decisions from two major central banks.

Tech earnings: Alphabet, Microsoft beat; Meta’s EPS falls sharply

Several large technology groups reported third-quarter results this week. Overall the results were mixed but skewed to the upside on revenues.

Alphabet. Total revenue was reported at $102.35 billion, above consensus of $99.79 billion, representing year-on-year growth of c. 15.9 per cent and quarter-on-quarter growth of c. 6.1 per cent. EPS of $2.87 exceeded forecasts of $2.29, implying a year-on-year increase of c. 35 per cent.

Microsoft. Revenue was $77.7 billion versus an expected $75.32 billion (year-on-year growth c. 18.4 per cent). EPS of $4.13 beat the consensus $3.66, representing significant year-on-year and quarter-on-quarter improvements.

Meta Platforms. Revenue of $51.24 billion exceeded expectations of $49.36 billion (year-on-year growth c. 26.2%). However, EPS was reported at $1.05 against an anticipated $6.68, a dramatic year-on-year decline of c. 82 per cent and a quarter-on-quarter fall of c. 85 per cent — a material earnings surprise that will prompt questions about margin pressure and monetisation trends.