FOMC: The endgame for insurance cuts by Emkay Global Financial Services Ltd
FOMC: The endgame for insurance cuts
* he Fed, for a third consecutive meeting, cut its policy rate by 25bps to 3.5-3.75%, as widely expected, with 3 dissents (one dovish, two hawkish). Risks to the labor market prompted the Dec-25 cut. Powell raised a few eyebrows in noting that job growth continues to be overstated by around60k/month, implying that the actual job growth has perhaps been negative which merits a more neutral policy rate.
* But the message from this meeting was that the time for insurance cuts is over, and that further cuts will only come with a material labor market deterioration. Interestingly, with Powell stating that true payroll growth has likely been closer to -20k per month since April (vs the reported +40k), there may be downward benchmark revisions ahead, suggesting job losses are already underway.
* Although Powell sounded relaxed on inflation, the tension in the Fed's dual mandate manifested in the three dissents in the vote split around the cut-two hawkish (Goolsbee and Schmid) and one dovish (Miran).
* While risks are two-sided, the Summary of Economic Projections (SEP) showed Goldilocks-esque revisions to the 2026 outlook of upward revision in growth and downward revision in inflation ahead-potentially reflecting the higher expected productivity growth. 2026 growth was revised up by 0.5%-pt to 2.3% while core inflation was revised down a tick, to 2.5%, and the unemployment rate is expected to dip to 4.4% from 4.5% this year.
* That the SEP revised up growth by 0.6%-pts over 2025 and 2026, and yet did not revise the unemployment rate at all, is a strong statement about the supply side of the economy. That this is being done despite supply concerns around immigration policies is an even stronger statement about productivity growth - potentially related to AI.
* The median dot looks for one cut in 2026 and another in 2027, unchanged from Sep-25, while the market is now pricing in nearly three cuts through to the end of 2026.
* Given expected growth resilience and elevated inflation, we feel Powell's remarks raise the bar for future cuts. The additional cut(s) in 2026 is now well tied to how shaky the labor market is ahead. But the cut cycle is mostly over. We reckon the US labor market may remain soft till the tariff pass-through is complete.
* Market reaction: US bond yields fell by 2-5bps and the broad curve bull steepened, with the move largely coming during Powell's presser, which markets read as less hawkish guidance than expected. The 10-year UST yield eased by 4bps to 4.15%. DXY was mildly weaker than peers while US equities gained ~0.8%.
India's FX and rates may stay agnostic to the Fed outcome
* While US asset-class markets have taken the less hawkish Fed message positively, with the mild bull steepening, India's rates market may stay sticky to the bear-steepness, reflecting structural DD-SS mismatch. The Rupee may continue to track the US-India trade deal and the pressure emanating from weakness in both current and capital accounts. However, no negative shock from the Fed has spared Asian (and Indian) central banks from any negative externalities.
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