As expected, the U.S. Federal Reserve cut the benchmark rate in September. The U.S. rate-cut cycle has resumed, but Federal Reserve Chair Jerome Powell remained hawkish (favoring monetary tightening). Several decisive moments emerged during Powell's press conference. Let's review them and consider how to adjust asset allocations going forward.
First, Powell made clear that this rate cut was a "risk management cut." He said there is "no guarantee that this is the beginning of further cuts," signaling that the Fed has not entered a sustained currency policy easing phase.
Powell judged that, although economic growth is slowing and unemployment is rising, the economic situation is "not bad." While the Fed cut rates with employment conditions in mind rather than prices, investors should not expect continued rate cuts. President Trump pressed daily for a "big cut (a 0.5 percentage point reduction)," but, based on the judgment of Federal Reserve Commissioners, a conventional 0.25 percentage point cut was made.
It is also worth noting that opinions among Federal Reserve Commissioners were sharply divided on the future direction of currency policy. The Commissioners generally projected two additional cuts by the end of the year.
However, among the 17 Commissioners, one actually expected a hike, and six projected a hold. The increased uncertainty about the Fed's currency policy path could somewhat dampen investor sentiment. Uncertainty is a factor the market fears more than currency tightening.
More than at any other time, the weakening of the Fed's independence is fueling unease. In fact, the most striking scene of this meeting was Powell's effort to restore the Federal Reserve's independence, which President Donald Trump had damaged.
The first question at the press conference was not about the rate-cut decision. Typically, when the Fed adjusts rates, interest centers on how much further it will cut and when. But what U.S. media wanted to know even more was whether the Fed's political independence could be preserved.
The first question asked Powell's view on Federal Reserve Board member Stephen Miran, appointed by Trump, concurrently serving as chair of the White House Council of Economic Advisers, and Powell said, "We are working to maintain the Fed's independence, and I have nothing further to add." It is also burdensome that Powell must hold his tongue.
The indicator to watch going forward is employment. With the Fed's principle of making policy decisions based on economic data unchanged, Powell was most concerned about a contraction in the labor market rather than prices. If employment indicators deteriorate, the pressure to cut rates will inevitably increase.