"No surprises," "risk-managed rate cut," "Powell more balanced" -- Wall Street interprets the Fed's decision

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The Fed cut rates by 25 basis points overnight as expected, which seemed "unsurprising" but was in fact "full of confusion."

Although the latest "dot plot" signals more rate cuts this year, Fed Chair Powell described this as a "risk management rate cut," emphasized a weakening labor market, and downplayed the possibility of aggressive easing.

Mike Cahill, Head of G10 FX Research and Strategy at Goldman Sachs, noted that Powell's press conference was "clearly more balanced than the FOMC statement." He analyzed that this meeting was a "pivot" for the committee, and its main motivation has shifted to "the employment mandate" rather than the previous inflation focus. Nevertheless, Cahill also stressed that Powell’s message indicated that while the risks are new, they are "not so severe as to require consideration of extraordinary policy measures."

This combination of "dovish actions and hawkish rhetoric" triggered violent market volatility, highlighting the Fed's delicate stance in balancing the challenges of employment and inflation and the high uncertainty of future policy paths.

Complex signals! UBS: Dovish rate cut while forecasting faster economic growth and higher inflation

The FOMC decided by a vote of 11 to 1 to lower the federal funds target range by 25 basis points to 4%–4.25%. According to Bloomberg, Wall Street analysts generally described this decision as "entirely as expected."

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

Meanwhile, the Fed raised its 2026 economic growth forecast and slightly increased next year's inflation projection. UBS analysts observed that the Fed, while cutting rates, "is forecasting accelerated economic growth, lower unemployment, and higher inflation," making it "difficult" for reporters at the press conference to understand this "inconsistency."

Currently, the Fed has cut rates and indicated it is very likely to cut rates twice more this year.However, in sharp contrast, while cutting rates, the Fed is projecting faster economic growth, lower unemployment, and inflation returning to a level (slightly above) the target by the end of the forecast period.

Goldman Sachs: Powell's language was "more balanced"

The market's initial optimism quickly cooled during Powell's press conference. He defined the rate cut as a "risk management" measure intended to provide the economy with "some protection." Powell said, "No one really knows what the economy will look like three years from now," emphasizing, "We are now making decisions on a meeting-by-meeting basis."

Powell pointed out that revised employment figures show "the labor market is 'no longer strong'," and said this shift to a "more neutral" stance will "hopefully" help the labor market.

The current situation is, we see inflation, we still expect it to rise, but perhaps not as much as we expected a few months ago.

Mike Cahill of Goldman Sachs G10 FX Research and Strategy stated in his first post-meeting report that Powell's press conference was "clearly more balanced than the statement." This is mainly due to two points:

"First, Powell suggested this meeting was a ‘pivot’ for the committee, unlike the past years when inflation dominated rate decisions. Today’s focus is the employment mandate, clearly reflected in the changes to the statement. While not new for markets, this is new for the committee and explains the focus of some modifications."

"Second, Powell’s initial explanation of the rate cut was a bit vague, describing it as providing some protection to the economy and helping ensure better economic outcomes. This was said when explaining the changes in the Summary of Economic Projections (SEP), which is important. He later described this as the first step on this path and mentioned market pricing as well as the process of returning to a neutral policy."

Cahill concluded that the overall message was, "The risks are new, but not severe enough to warrant consideration of extraordinary policy measures, which would only happen if policy were clearly in the wrong place." He believes that the FOMC's message today is that the labor market has become the main motivation.

However, Powell also decisively poured cold water on expectations of aggressive easing, stating, "There is absolutely no broad support for a 50-basis-point rate cut." He described the Fed's stance as "more balanced", downplayed the importance of the dot plot, and reiterated that policy would be data-dependent and decided "meeting by meeting."

Violent market swings: "Dovish party" turns to "hawkish reversal"

From the release of the Fed statement to the end of Powell's speech, the markets went through a "roller coaster" of "chaos."

Initially, the dovish statement and dot plot pushed US Treasury yields lower, and risk assets such as small-cap stocks surged.

But as Horizon Investments analyst Scott Ladner commented:

"The initial reaction in equities was clearly overheated, with small-cap and cyclical stocks soaring while the Nasdaq fell, but this reaction didn’t spill over to other markets... This cross-asset divergence somewhat confirms that the current stock market reaction is more about position adjustments than a macroeconomic interpretation of the Fed's outcome."

But as Powell began to speak, the market reversed rapidly. US Treasury yields soared, with the 10-year yield rebounding to the day's high after briefly dipping below 4.00%.

The US dollar index, after a sharp dip and V-shaped recovery, closed roughly flat for the day.

In equities, small-caps were especially dramatic, surging after the statement but giving back most gains after Powell spoke. Ultimately, the Dow closed up, but the S&P 500 and Nasdaq closed down, with "tech stocks leading losses."

Looking ahead: Uncertainty in the data-dependent path

Looking forward, Wall Street generally believes the Fed is walking a "tightrope." Bloomberg, citing an unnamed analyst, commented, "This 25-basis-point rate cut by the Fed is a clear signal: a weak labor market and stubborn inflation prompted policymakers to act—but gradually. This is not a pivot, but a measured step."

For investors, this means mild rate relief, not a "fireworks extravaganza." As Powell said 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 in the Fed's future policy path amid dual risks of inflation and employment. Against this background, upcoming inflation and employment data will be key in determining next steps.

Risk DisclaimerThe market carries risk, and investments must be made cautiously. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinion, view, or conclusion in this article is suitable for their particular situation. Investing accordingly is at your own risk. ```