How the Fed's decision impacts risk assets

The outcome of this morning's Federal Open Market Committee (FOMC) meeting has rattled key risk assets, including stocks, the AUD/USD, and Bitcoin

The Federal Reserve (Fed) announced a smaller rate cut of 25 basis points (bps) on Wednesday, bringing the benchmark interest rate to a range of 4.25% to 4.50%. The decision, which was largely anticipated by markets, had a significant impact on various risk assets and caused the US dollar and US yields to surge higher.

The Fed's decision to slow the pace of rate cuts in 2025 also had a notable effect on markets. The median dot plot for 2025 now shows only two 25 bps cuts, compared to four that were previously projected. This adjustment reflects a less dovish outlook from the central bank.

Despite the smaller rate cut, the Fed's revised economic projections were more hawkish than anticipated by many analysts. However, they largely aligned with the pricing in the rates market leading up to the meeting, as highlighted in our Wall Street/FOMC article earlier this week.

The rates market now anticipates just 32 bps of rate cuts for 2025 (versus 50 bps yesterday), following the Fed's projections for a lower unemployment rate, a higher forecast for gross domestic product (GDP), and core inflation that is still above the central bank's 2% target. The next full rate cut by the Fed is not anticipated until September 2025.

Stepping back, this morning's Fed rate cut outcome should not have been too surprising following recent warm US inflation and activity data. Notably, markets have rallied strongly into the Fed meeting, and now appear to be pricing in two rate cuts for 2024 and another two for 2025, before rates are seen to be broadly on hold for the remainder of the year.

'Inflation has made progress towards the Committee's 2 percent objective but remains somewhat elevated. The labor market continues to be very strong, with the unemployment rate remaining low and job gains being robust in recent months.'