It's pretty much a reset to back before Friday's US jobs report release
Odds of a 50 bps rate cut at the end of this month have gone back up from 0% to ~24% now, and that is just shy of the ~27% probability priced in before last Friday's US jobs report.
In essence, all Powell's testimony did yesterday was reset back expectations to what they were last week and he couldn't have been more clear with these comments:
- Uncertainties since June FOMC meeting continued to dim outlook
- Fed will act as appropriate to sustain US economic growth
- Inflationary pressures remain muted
- There is a risk that weak inflation will be more persistent than currently anticipated
- Current levels of wage growth are not enough to put upwards pressure on inflation
- Fed has no evidence of calling this a "hot" labour market
That very much reaffirms a 25 bps rate cut but also leaves the door open for the Fed to be more aggressive when easing, if need be. And I think that's eventually what Powell and the Fed wants to get market expectations settled at.
This will allow them some room to keep the "insurance rate cut" playbook in their pocket but at the same time not be imprudent so as to rule out future rate cuts in case global trade tensions escalate and the US economy stutters.
As for what we can expect now, I reckon economic data and trade headlines are the best gauges of sentiment of which side the Fed will lean towards in the coming months and that could make for some really choppy trading in the dollar in the mean time.
