Fed Chair Jerome Powell just threw cold water on hopes for another rate cut in December. At his post-meeting press conference, Powell made it clear there's no set path for monetary policy going forward. Translation? Don't hold your breath.
The October rate cut barely squeaked through with two dissenting votes. One FOMC member wanted a more aggressive 50-basis-point slash. Another opposed cutting at all. That's not exactly a unified front. These divisions signal Powell's got a fractured committee on his hands, making it nearly impossible to commit to anything concrete for December.
Here's the problem. Inflation is still sticky. The CPI XYOY and CPI YOY indices show prices remain above target levels, which makes the Fed nervous about cutting too fast. The fed funds rate sits just 75 basis points above inflation right now. That's not much cushion.
Powell emphasized future decisions will depend entirely on incoming economic data and financial conditions. But here's the kicker: reliable federal data has become harder to come by, making forecasting a nightmare.
Powell's remarks sent a clear message. Without a decisive downward trend in inflation, another cut isn't happening. Markets had been pricing in a series of rate reductions, expecting rates below 3% by mid-2026. Those expectations have now cooled markedly. December cut odds? Down. Volatility? Up.
Meanwhile, the Fed is ending quantitative tightening on December 1st. The balance sheet has already shrunk by over $2.2 trillion, with reserves now sitting around 10% of GDP. The goal is maintaining an ample but not abundant level of reserves. One less thing to worry about, at least.
For bond investors, this creates a messy situation. Very short-term securities mean reinvestment risk. Longer maturities expose you to interest rate volatility. Intermediate durations of five to 10 years seem to be the sweet spot given all this uncertainty.
Bottom line? Policy uncertainty has spiked. Market participants should expect a bumpier, less predictable rate path ahead. Powell's made that abundantly clear. December's looking increasingly unlikely for a cut. This heightened uncertainty around rate cut timing typically strengthens the dollar as forex traders adjust their currency positions based on the expected interest rate differential between the U.S. and other economies. Understanding central bank policy changes and their impact on currency values helps explain why the dollar gains strength when the Fed signals a more hawkish stance relative to other major central banks.
