Fed Cuts Rates by Quarter Point as Growth Risks Escalate

The Federal Reserve lowered its benchmark rate by 25 basis points to 3.75%–4.00%, a shift that immediately bled into FX pricing—most notably the euro–dollar pair (Zorrox: EURUSD), as traders marked down U.S. yields and tested dollar support into the close. The move, widely anticipated, reflects mounting concern that slower hiring, a prolonged government shutdown, and tighter credit are starting to bite.

A Preemptive Move in a Data Vacuum

Chair Jerome Powell framed the decision around “clear evidence of cooling in both the labor market and underlying demand,” even as inflation remains above target but trends lower. With official releases delayed by the shutdown, policymakers leaned on private indicators and surveys. Powell called it “steering in partial darkness,” and kept optionality: more easing if disinflation persists, restraint if price pressures re-accelerate.

This is the second cut of the year and formalizes the pivot away from the two-year anti-inflation stance. The committee’s message was pragmatic—support growth without declaring victory on prices.

Markets: Relief, Then a Rethink

Treasury yields fell across the curve, with the two-year briefly slipping under 4%. Equities popped on the headline—real estate, tech and financials led—before tempering gains as the press conference turned cautious. The dollar softened, gold and oil ticked higher, and credit spreads tightened modestly. Positioning stayed measured: no one wants to over-commit if inflation prints wobble or the shutdown drags.

The Macro Backdrop

Softening payrolls, weaker consumer sentiment, and downbeat manufacturing surveys set the stage. The fiscal standoff has trimmed government outlays and delayed public pay, weighing on household cash flow. Core inflation sits near 3.0% y/y—its lowest in more than two years, still above the 2% target. Projections imply one or two additional cuts by mid-2026 if the glidepath holds.

Dissenters warned against easing too soon, arguing a fiscal restart could reignite prices. Others feared that staying tight into year-end risks a shallow recession. Powell’s line: no preset path; decisions will reflect the mix of risks.

Global Read-Through

The cut nudges the global easing cycle forward. The ECB is tipped to trim next month, and several EM central banks gain breathing room if the dollar remains softer. A longer U.S. easing phase would steepen curves and revive risk appetite; a surprise inflation bump would force a rapid rethink across bonds and FX.

Tips for Traders

• Watch the euro–dollar pair (Zorrox: EURUSD) as the cleanest read-through on post-Fed sentiment — sustained closes above recent resistance would confirm a weaker-USD trend.

• Track 2s/10s curve steepening; a persistent move higher usually signals shifting growth and inflation expectations.

• Stay selective with duration — any hint of a December pause could unwind part of the bond rally.

• Lean into quality growth on dips if the dollar weakens and real yields drift lower; fade rallies if inflation surprises to the upside.

• Maintain optionality around inflation prints and shutdown headlines — event risk keeps volatility two-sided.