The dollar slipped as market sentiment and the Fed's dovishness weakened
Another quarter-point interest rate cut as the Fed signals a possible pause in the path of cuts, amid uncertainty over inflation data and labor market strength.
On Wednesday, the U.S. Federal Reserve announced a 25 basis point (0.25%) rate cut, in a move aimed at supporting economic growth.
However, the announcement was quickly overshadowed by a cautious tone, with the central bank signaling that the pace of accommodative monetary policy could see a pause in the near future.
This restraint came in anticipation of greater clarity on two key trends: Weakening labor market indicators and inflation, which the Fed described as still relatively high.
Mixed expectations: Fed holds back as markets look for two cuts
This is one source of uncertainty in financial markets.
While market participants expect two 0.25% rate cuts in 2026 (bringing the rate to around 3.0%), the Fed's projections show a more conservative view, with policymakers expecting only one cut next year, and an additional one in 2027.
Fed Chair Jerome Powell emphasized that the baseline scenario does not include a rate hike soon, saying: "The next step is unlikely to be a rate hike.
Challenges complicate the task: Government shutdown and data crisis
The U.S. central bank faces a dilemma in assessing the real economic situation due to the lack of recent and reliable data.
This imbalance is largely due to the impact of the 43-day government shutdown last October and November, which disrupted the flow of vital reports and statistics.
Thus, the path of monetary policy in the coming period will depend on the quality and clarity of economic data, which will gradually begin to normalize.
Various statements add to the uncertainty
In the midst of this uncertainty, statements by senior officials add another layer of complexity:
Kevin Hassett, White House economic adviser and a leading candidate to head the Fed if Trump is re-elected, said there is "plenty of room" for further cuts, although he cautioned that rising inflation could alter that view.
President Donald Trump also commented on the decision, describing it as 'slight', expressing his opinion that it 'could have been bigger'.
Anticipation in an exceptional period
In short, investors are faced with uncertainty regarding the interest rate outlook for the coming year.
The Fed is trying to strike a difficult balance between maintaining growth momentum and curbing inflation, but it is doing so with incomplete economic data in hand.
While the picture is beginning to blur as the data flow returns, anticipation will remain the order of the day in the coming months, waiting for decisive signals from the labor market and price indexes to determine the next direction of US monetary policy.
