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The DXY Index rose 0.5% to 99.1 overnight after Fed Chair Jerome Powell pushed back on the market’s bet for a third rate cut in December. The Fed delivered the anticipated 25-bps cut to 3.75-4.00% with two dissent votes. Fed Governor Stephen Miran wanted a larger 50-bps reduction, while Kansas City Fed President Jeffrey Schmid favoured keeping rates unchanged. Powell emphasized that the FOMC held strongly differing views on the future path of monetary policy. Today’s advance US GDP growth should affirm Powell’s assessment that the US economy was growing at a "moderate pace" and potentially "somewhat firmer" than previously expected, driven mainly by consumer spending.
However, the DXY Index’s rebound was capped at a significant trendline resistance at 99.3. Given how aggressively the futures market was pricing in a December cut (a 111% chance in mid-October), Powell was likely managing expectations too by discouraging markets from leaning toward 50-bps rate cut bets. Tomorrow’s PCE inflation should affirm his view that inflation was elevated but not at risk of becoming entrenched due to tariff-led inflation. Powell assessed the labor market as "less dynamic and somewhat softer," with rising downside risks to employment. Due to “a more significant tightening” in the money market, the FOMC decided to end its quantitative tightening programme on December 1 by rolling maturing agency debt into Treasury bills.
Apart from the next rate decision in December, markets are also awaiting US President Donald Trump’s nomination of Powell’s successor after Thanksgiving (November 27). US Treasury Secretary Scott Bessent, who is finalising the selection process, has publicly suggested that announcing the nominee early would mean "no one is really going to care what Jerome Powell has to say anymore." An early nomination would create a shadow chair by allowing Trump’s nominee to replace Stephen Miran, whose term as Fed Governor ends on January 31, 2026. Trump is clear about avoiding another mistake, such as appointing an independent-minded Fed Chair like Powell and seeking a successor who aligns more closely with his economic agenda, particularly regarding lower interest rates and reduced regulation.
Overall, we caution against reading too much into the USD’s knee-jerk reaction to yesterday’s FOMC. Powell is managing significant risks amid the ongoing US government shutdown and the risk of becoming a lame duck. The situation is forcing the Fed to rely on limited and less comprehensive data, which Powell himself has compared to "driving in the fog."
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