"No surprises," "risk management-style rate cuts," "Powell is more balanced" – Wall Street interprets the Federal Reserve's decision

The Federal Reserve unexpectedly cut interest rates by 25 basis points, which seems "not surprising," but in fact is "full of chaos."

Although the latest "dot plot" suggests more rate cuts this year, Federal Reserve Chairman Jerome Powell defined it as a "risk management-style rate cut," emphasizing the weakness in the labor market while downplaying the possibility of aggressive easing.

Mike Cahill, head of G10 foreign exchange research and strategy at Goldman Sachs, pointed out that Powell's press conference "was clearly more balanced in wording than the FOMC statement." His analysis indicates that this meeting represents a "pivot" for the committee, with its primary focus shifting to "employment-related tasks" rather than the past inflation-driven agenda. Nevertheless, Cahill also emphasized that Powell's message indicates that while current risks are new, they are "not severe enough to warrant consideration of extraordinary policy measures."

This combination of "dovish actions and hawkish rhetoric" triggered significant market turbulence, highlighting the Federal Reserve's delicate position in balancing employment and inflation challenges and the high uncertainty surrounding future policy paths.

Mixed Signals! UBS: Predicting Economic Acceleration and Rising Inflation While Dovishly Cutting Rates

The Federal Open Market Committee (FOMC) voted 11 to 1 to lower the federal funds rate target range by 25 basis points to 4%-4.25%. According to Bloomberg, Wall Street analysts generally described this decision as "fully in line with expectations."

However, the real "surprise" lies in the details. The latest "dot plot" shows that among the 19 FOMC members, 12 expect at least one more rate cut this year (of which 9 expect two cuts, 2 expect one cut, and 1 even expects five cuts), which is one more than their prediction in June, releasing a stronger dovish signal than expected.

At the same time, the Federal Reserve raised its economic growth forecast for 2026 and slightly increased its inflation forecast for next year. UBS analysts noted that the Federal Reserve, while cutting rates, "predicts accelerating economic growth, a declining unemployment rate, and rising inflation," which made it "difficult" for reporters to understand this "inconsistency" during the press conference.

Currently, the Federal Reserve has cut rates and hinted that it is likely to cut rates two more times this year. However, in stark contrast, the Federal Reserve predicts accelerating economic growth, a declining unemployment rate, and inflation returning to (slightly above) target levels by the end of the forecast period while cutting rates.

Goldman Sachs: Powell's Wording is "More Balanced"

The initial optimism in the market quickly cooled during Powell's press conference. He defined this rate cut as a "risk management" measure aimed at providing "some assurance" to the economy, stating, "No one really knows what the economy will look like three years from now," and emphasized, "We are in a state of making decisions at each meeting."Powell clearly pointed out that the revised employment data shows that "the labor market is 'no longer solid'" and stated that this shift to a "more neutral" stance is "expected" to help the labor market.

The current situation is that we see inflation, and we still expect it to rise, possibly not as high as we anticipated a few months ago.

Mike Cahill, head of G10 foreign exchange research and strategy at Goldman Sachs, noted in the first report after the meeting that Powell's press conference was "significantly more balanced than the wording of the statement." This is mainly attributed to two points:

"First, Powell hinted that this meeting is a 'pivot' for the committee, which is different from the inflation-dominated rate decisions of the past few years. Today's focus is on the employment aspect, and the modifications in the statement made this clear. This is not new for the market, but it is new for the committee, explaining some of the highlights in the statement modifications."

"Second, Powell's initial explanation of rate cuts was somewhat vague; he described it as providing some assurance to the economy and helping to ensure better economic outcomes. This was raised when explaining the changes in the Summary of Economic Projections (SEP), which is important. He later described it as the first step on this path and mentioned market pricing as well as the process of returning to neutral policy."

Cahill summarized that the overall message is, "The risks are new, but the severity is not enough to warrant consideration of extraordinary policy measures; this would only be done if the policy is clearly in the wrong position." He believes that the FOMC "conveyed today that the labor market has become the main driver."

However, Powell also firmly poured cold water on aggressive easing expectations, stating, "There is absolutely no broad support for a 50 basis point rate cut." He described the Federal Reserve's stance as "more balanced" and downplayed the importance of the dot plot, reiterating that policy will depend on future data and is in a "meeting-by-meeting decision" state.

Market Volatility: From "Dovish Frenzy" to "Hawkish Reversal"

From the release of the Federal Reserve's statement to the end of Powell's speech, the market experienced a "roller coaster" of "chaos."

Initially, the dovish statement and dot plot pushed U.S. Treasury yields lower, and risk assets like small-cap stocks surged.

But as Horizon Investments analyst Scott Ladner commented:

"The initial reaction in stocks was clearly an 'overheated' response, with small-cap and cyclical stocks soaring while the Nasdaq index fell, but this reaction did not spread to other markets... This cross-asset divergence somewhat confirms that the current reaction in the stock market is more related to position adjustments rather than interpretations of the macroeconomic implications of the Federal Reserve's outcomes."

However, as Powell began to speak, the market direction quickly reversed. U.S. Treasury yields surged, with the 10-year Treasury yield rapidly rebounding to intraday highs after briefly dipping below 4.00%

The US dollar index closed basically flat after experiencing a sharp decline and a V-shaped rebound.

In the stock market, the performance of small-cap stocks was particularly dramatic, surging sharply after the announcement but giving back most of the gains after Powell's speech. Ultimately, the Dow Jones Industrial Average closed up, while the S&P 500 and Nasdaq indices closed down, with "tech stocks leading the decline."

Outlook: Path Uncertainty Under Data Dependence

Looking ahead, Wall Street generally believes that the Federal Reserve is walking a "tightrope." Bloomberg cited an unnamed analyst's view that "the Fed's 25 basis point rate cut is a clear signal: the weak labor market and stubborn inflation have prompted policymakers to take action—but gradually. This is not a pivot, but a measured step."

For investors, this means moderate rate relief rather than a "fireworks-like feast." As Powell stated at the end of the press conference, "No one really knows what the economy will look like three years from now," highlighting the high uncertainty of the Fed's future policy path in the context of dual risks of inflation and employment. In this context, the upcoming inflation and employment data will be key to determining the next steps