United States Federal Reserve Lowers Rates, Signals Cuts

(MENAFN- Daily Forex) The Fed's decision to lower rates yesterday is significant, as it marks the first time that the Fed has lowered interest rates since December 2024. The money markets had priced in the quarter-point reduction at 96% probability, so the move was widely expected. What was of more interest to investors was that the Fed 'dot plot', which charts the rate path of members participating in the meeting. The dot plot projected two more rate cuts before the end of the year, a clear indication that the Fed is in a dovish mood.

The Fed statement noted that“uncertainty about the economic outlook remains elevated” and that members viewed that the downside risks to employment had risen. Members also expressed concern about inflation, which“has moved up and remains somewhat elevated”. The statement said that members decided to lower rates“in light of the shift in the balance of risks”.

Fed decisions have traditionally been unanimous, but that may be changing. In July, two members voted against the decision to hold rates and at Wednesday's meeting, one member voted for a half-point cut. This points to a dovish shift in the Fed which could result in one or two rate cuts before the end of the year and additional reductions in 2026: Cooling Labor Market Required Fed to Act

At his press conference, Fed Chair Powell said that the rate cut was necessary due to the cooling labor market, reiterating what was mentioned in the rate statement. Powell said the Fed doesn't want to see the labor market loosen any further. That could mean that if upcoming employment data is weaker than expected, the Fed is likely to respond with rate cuts. Powell also said that he expected inflation on goods prices to continue to increase this year and 2026, a likely reference to the US tariffs that have made imports more expensive Dollar Edges Higher, Stock Markets Choppy After Rate Decision

The Federal Reserve's decision to lower rates hasn't had much impact on the US Dollar while the US stock markets were choppy on Wednesday.

The GBP/USD currency pair is unchanged on Thursday and USD/JPY is up by 0.13%. The exception is NZD/USD which has declined by 0.87%, but that is likely due to a soft GDP reading out of New Zealand.

The US stock market was choppy on Wednesday in response to the Fed announcement and closed with marginal losses.

The S&P 500 Index declined 6 points (0.1%) and closed at 6,600.

The Nasdaq 100 Index dropped 50 points (0.21%) and closed at 23,223.

However, both indices traded at new record highs as the London session got underway in off-hours trading.

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