Fed delivers the third cut of the year, signals possible long pause

The Fed cut rates again last night: The US Federal Reserve lowered its benchmark rate by 25 bps overnight, marking the third such move this year following cuts in September and October, according to a statement. The target rate now sits at 3.5-3.75%.

This could be the last one for a while. Policymaker projections issued after the meeting pointed to a single quarter-percentage-point cut next year. It’s not clear when this could be, but the language used in the statement echoes that of a statement from December 2024, after which the Fed refrained from cuts until September. “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement said. The next meeting is taking place on 25-26 January.

Federal Reserve Chair Jerome Powell said the Fed is “well positioned to wait and see how the economy performs” — another signal that the next cut won’t be for a while. Powell is waiting on inflation, which remains “somewhat elevated,” to go down, and to see what happens to the job market, which has shown signs of softening. Policymakers’ projections see inflation ending next year at 2:4%, and the unemployment rate remaining at a moderate 4.4%.

The Fed is also more divided than ever. Three dissenting votes were against the rate cut, which hasn’t happened since 2019. Seven officials also indicated they want no cuts next year.

The lack of clarity on what comes next is made worse by the fact that the Fed’s chair will change early next year, along with the slow release of economic indicators following the US government shutdown. “Given the lack of consensus on the Committee displayed today, along with the slow release of traditional economic data, and the arrival of a new Fed chair early in 2026, we think the Fed is likely to remain on hold for a while, although continued softness in some of the labor indicators can certainly bring another 25-basis-point cut into the mix for January,” Rick Rieder, chief investment officer for global fixed income at BlackRock and one of the shortlisted candidates Trump is considering as a successor to Powell, is quoted as saying.

The Fed also said it would start buying short-dated government bonds — USD 40 bn a month — to manage market liquidity, which Powell said helps maintain control of the policy rate and downplayed it as a technical adjustment as opposed to stimulus.

Market reax: Stocks rose following the decision, with the S&P 500 up 0.7%, while 10-year US Treasury yields dropped to around 4.15%.

MARKETS THIS MORNING-

Asian markets are mostly in the green this morning, tracking gains on Wall Street following the Fed’s rate cut, with the exception of Japan’s Nikkei, which is down 0.1% after starting the day in positive territory. Over on Wall Street, futures point to a lower open after Oracle’s shares took a hit in after-hours trading in response to disappointing quarterly revenue results that reignited concerns of overly valued tech stocks.

THE CLOSING BELL-

The DFM rose 0.5% yesterday on turnover of AED 704.3 mn. The index is up 17.8% YTD.

In the green: International Financial Advisors Holding Company (+14.8%), National Cement Company (+13.8%), and Ajman Bank (+5.8%).

In the red: Gulf Navigation Holding (-9.8%), Dubai National Ins. and Reins. (-9.7%), and Sukoon Takaful (-9.6%).

Over on the ADX, the index fell 0.1% on turnover of AED 1.1 bn. Meanwhile, Nasdaq Dubai was up 0.2%.