Markets react to dovish Fed messaging as target rate remains unchanged
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The Fed elected to hold the target rate constant last week, but dovish messaging and disappointing jobs data led markets to reevaluate the chance of future hikes.
Fed holds rates steady
The Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.25%–5.50%, which was consistent with market expectations for the meeting. The FOMC’s published statement referenced “strong” economic expansion in the third quarter but also called attention to “tighter financial and credit conditions for households and businesses,” in reference to the cumulative effects of monetary tightening to date. Overall, markets interpreted the Fed’s messaging surrounding the decision as dovish, and treasuries fell over the course of the week. The current forward curve is now significantly more downward-sloping than it was before the meeting, with expectations that 3-month Term SOFR will dip below 4.0% late next year.
The decrease in rates may incentivize some corporates with floating-rate debt to consider locking in at current levels, using an interest rate swap or cap. One benefit of the downward-sloping curve is that the swap rate one can expect to lock in will be lower than current rate fixings, meaning that companies can realize immediate savings in interest expense in the short term.
Deceleration in jobs growth
Nonfarm payrolls increased by 150,000 for October, below the 170,000 estimate as well as the 297,000 reading from September. Markets interpreted the report as providing further evidence that the jobs market is finally cooling down, with unemployment now at 3.9%—the highest level since January 2022. Health care and government jobs drove growth, while manufacturing saw a decline due in part to ongoing auto strikes. Rates fell and equities rallied in wake of the payroll reading, as markets expect that labor market weakness could lead to more dovish monetary policy from the Fed.
Dollar strength dips
The U.S. dollar index, which weighs USD strength against a basket of currencies, fell last week in wake of the Fed decision and the jobs data. Much of the dollar’s strength over the past two years has been driven by the monetary tightening, so the prospect of falling rates will continue to weigh on its strength in the coming months. Companies with predominantly USD sales and foreign expenses should keep a close eye on the outlook for the dollar going forward, as weakening in USD can lead to material erosion in margin.
It’s a quiet week on the economic data front, but Fed Chair Jerome Powell and several other Fed officials will speak at events throughout the week. Markets will keep a close eye on their messaging in the wake of the recent jobs data.
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