A divided US Federal Reserve cut interest rates by 25 basis points on Wednesday, while Fed Chair Jerome Powell pushed back on market expectations for another rate cut later this year.
Most central banks in the Gulf Co-operation Council, which follow Fed decisions because of the dollar peg, also reduced rates on Wednesday.
The UAE Central Bank reduced its target base rate by 25 basis points, while the Saudi Central Bank lowered its repurchase agreement rate by a quarter-point. The central banks of Qatar, Bahrain and Oman all mirrored the Fed's move, while Kuwait's central bank held rates steady.
US policymakers voted 10-2 in support of reducing the federal funds target range to 3.75-4.00 per cent, with Fed governor Stephen Miran arguing for a half-point cut while Kansas City President Jeffrey Schmid preferred to hold rates steady.
Mr Powell hinted at a discordance among Fed officials who are dealing with risks to both sides of its inflation and employment mandates. The Fed's tool to tackle those two risks – interest rates – is not able to handle both at once, leaving the central bank to face what Mr Powell calls a "no risk-free path for policy".
“In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December," he told reporters.
"A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it. Policy is not on a preset course."
The Dow Jones Industrial Average reversed its gains after Mr Powell's remarks, ending Wednesday's trading session slightly lower. The yield on the 10-year Treasury climbed above 4 per cent while the dollar gained.
"The December meeting was largely a lock heading into this press conference and is now a 50-50 bet, and I think that’s why the market reacted the way it did," said Art Hogan, chief market strategist at B Riley Wealth.
"It was a hawkish cut."
Dual mandate in tension
Mr Powell said the economic data had changed little between the Fed's September and October meetings, with central bankers seeing upside risks to inflation and downside risks to employment.
"At a time when we have tension between our goals, we have strong views across the committee," he said.
While inflation risks dominated the Fed decisions earlier this year, growing evidence of a stalled labour market has led the central bank to shift its concern to the employment side of its mandate. While the unemployment rate remains near 4 per cent, hirings and firings have slowed.
chief market strategist at B Riley Wealth
At the same time, inflation has remained above the Fed's 2 per cent target for more than four years. In the only government data released since the shutdown began on October 1, the Labour Department reported that consumer price index inflation rose less than expected last month. But core inflation, seen as a better barometer as it strips the volatile food and energy indexes, rose 3 per cent annually.
"With the jobs market outlook not obviously worsening over the past month, inflation still stubbornly above target, and policy now closer to neutral, the bar to another cut in December is higher," Wells Fargo economists Sarah House and Michael Pugliese wrote to clients.
Adding further uncertainty to this is an extended government shutdown that has prevented the Fed from accessing data it relies on to monitor economic activity and make policy decisions. Mr Powell also suggested he expects the shutdown to weigh on economic activity.
"But these effects should reverse after the shutdown ends," he said.
QT end date
The Fed also announced it will stop shrinking its balance sheet – a process known as "quantitative tightening" or "QT" – on December 1 after signs of strain in money markets.
The process is the reversal of the significant bond purchases it made to stimulate the US economy during the Covid-19 pandemic, which is known as “quantitative easing”.
The Fed has been letting Treasuries and mortgage-backed securities run off its balance sheet since 2022, bringing the size of its holdings down from a peak of about $9 trillion to its current $6.6 trillion.
The Fed this year began slowing the pace of reducing the size of its portfolio without draining too much liquidity in overnight markets, but strains are beginning to emerge.
“Some things have been happening for some time now, showing a gradual tightening in money market conditions, really. In the last, call it three weeks or so, you’ve seen more significant tightening," Mr Powell said.
