Big interest rate moves are always a tricky business. Two weeks ago, the US central bankers may have hoped that by lowering the key interest rate corridor by 50 basis points, they would take the pressure off the table. But there is always the risk that a big interest rate move will only fuel expectations of further rapid interest rate moves. That, in other words, the Fed won’t be able to get rid of the genie it summoned with the 50-basis-point move, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

Fed may not be able to get rid of 50bp move consequences

“The surprisingly large move in September continues to be largely interpreted as an advance of the rate cuts that were expected for the rest of the year anyway, but not as a sign of a fundamentally high pace of rate cuts. The narrative suggested by Fed Chair Jay Powell’s comments at the time continues to dominate. The Fed’s decision has not shaken the medium-term expectations.”

“Although the unemployment rate in August was hardly lower than in the previous month, the job openings rate was significantly higher again at 4.8% (July: 4.6%). This in turn means that part of the unemployment is structurally explainable (in the figure below: as the large distance from the origin), mainly as mismatch unemployment; the cyclical part of unemployment – the one the Fed could do something about with loose monetary policy – is almost as low as in 2019.”

“The currency market is hardly reacting to the publication of the job openings statistics. But that also means that if the Fed were to use the labor market situation as a motive for aggressive interest rate cuts, it would probably be as wrong as it was in the summer of 2021, when it did nothing. A loose Fed policy based on that and the resulting USD weakness would probably be of relatively short duration.”