- On Wednesday, the Fed lowered borrowing costs by 25 bps.
- Data on Thursday revealed that US unemployment claims fell to 231,000.
- Next week, the US will release the core PCE price index report.
Interest futures eased on Friday as Treasury yields and the dollar continued their recovery after the expected Fed rate cut. However, the central bank confirmed that it would continue rate reduction for the rest of the year due to the growing risks to the labor market.
The anticipation for a Fed rate cut and a more dovish future has weighed on Treasury yields, allowing the bond market to rise. However, when the Fed finally cut rates, investors were selling the news. On Wednesday, the Fed lowered borrowing costs by 25 bps. Moreover, Powell admitted there was a growing risk to employment as the labor market slowed. This risk currently outweighs inflation risks. However, the Fed will continue watching inflation.
Additionally, Powell said the central bank would continue cutting rates this year. Traders expect at least two more rate cuts before the year ends. The dollar and Treasury yields briefly collapsed after the meeting. However, since there was no surprise, they recovered, sending interest futures lower.
Furthermore, there was uncertainty about the rate cuts next year. Powell said the central bank was not on a preset path. Therefore, the outlook could keep changing with incoming data. If the labor market starts showing signs of recovery and inflation remains high, the Fed might opt to pause and balance the risks.
US jobless claims (Source: Trading Economics)
Data on Thursday revealed that US unemployment claims fell to 231,000 compared to the forecast of 241,000. It eased concerns about the rapidly deteriorating labor market. However, the unemployment rate remains high at 4.3% and monthly employment numbers have dropped significantly. The central bank might need to do more to reverse this trend.
Meanwhile, inflation has come in slightly hotter-than-expected in recent months. Nevertheless, the spike was mainly expected given Trump’s tariffs. However, policymakers have admitted that the impact of tariffs on inflation has been limited. As long as it stays that way, the Fed can continue lowering borrowing costs. However, if the risk of higher inflation outweighs growth concerns, the outlook for monetary policy will also change.
Next week, the US will release the core PCE price index report. This figure is a key measure for inflation used by the Fed. Therefore, it could shape the outlook for future policy moves.