The Fed’s decision has not shaken medium-term expectations – Commerzbank

Big moves in interest rates are always a tricky business. Two weeks ago, US central bankers might have hoped that by reducing the key interest rate corridor by 50 basis points, they would ease the pressure. But there is always the risk that a big move in interest rates will only fuel expectations of more rapid interest rate moves. In other words, the Fed will not be able to get rid of the genius it invoked with the 50 basis point movement, says Ulrich Leuchtmann, Head of FX and Commodities Research at Commerzbank.

Fed may not be able to shake off fallout from 50bp move

“The surprisingly large move in September remains largely interpreted as a preview of rate cuts expected for the rest of the year anyway, but not as a sign of a fundamentally high pace of rate cuts. The narrative suggested by Fed Chairman Jay Powell’s comments, at that time continues to dominate. The Fed’s decision has not shaken medium-term expectations.”

“Although the unemployment rate in August was slightly lower than in the previous month, the job vacancy rate was significantly higher again at 4.8% (July: 4.6%). This in turn means that part of the Unemployment is structurally explainable (in the figure below: as the large distance from the origin), mainly as mismatch unemployment; the cyclical part of unemployment – ​​which the Fed could do something about with loose monetary policy – ​​is almost as “low as in 2019.”

“The currency market is barely reacting to the release of job openings statistics. But that also means that if the Fed used the labor market situation as a reason for aggressive interest rate cuts, it would probably be as wrong as it was in the summer 2021, when it did nothing. A loose Fed policy based on that and the resulting USD weakness would likely be relatively short-lived.”