Fed Cuts, Powell Cautions; Xi, Trump Begin Bargain Talks

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The Fed’s 25-basis-point cut to 3.75–4% was less a pivot than a plumbing fix. Powell’s message — liquidity, not leniency — signalled a cautious Fed unwilling to feed the market’s Goldilocks dream. The dollar firmed, yields rose, and risk assets wobbled. 
Europe gets a reason to pause with inflation near 2% allowing the ECB to rest without guilt as the euro drifts in calm, low-volatility trade. In Asia, markets watch the Trump–Xi meeting for signals beyond symbolic soybean deals. The yen stays under pressure as traders rebuild USD/JPY longs and the rupee is expected to hold steady.

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Fed: The Federal Reserve cut the funds target range by 25 basis points to 3.75–4 %, citing rising risks to employment that now outweigh inflation fears. Yet the easing came laced with restraint. Dissents on both hawkish and dovish sides laid bare the committee’s divide, and Powell’s pointed rejection of market bets on another move in December turned the message unmistakably hawkish. The Fed may have eased, but it is not easing up.

Liquidity, not leniency, defined the operation. Policymakers paired the cut with a series of technical adjustments designed to keep repo markets smooth rather than to signal a new dovish cycle:

1) Repo Dependence Deepens:  With a $ 2 trillion federal deficit swelling collateral supply, repo demand keeps soaring. The Fed now shoulders the role of permanent liquidity provider, effectively ceding control of its balance-sheet size to Treasury issuance. Stability in short-term funding has become inseparable from fiscal arithmetic.

2) Standing Repo Facility at Work:  Fed sees the SRF as a facility through which depository institutions or primary dealers can draw liquidity during the times of liquidity pressures. The SRF, established in 2021, lets banks and dealers borrow overnight against Treasuries and agency MBS whenever market stress drives repo rates above the Fed’s floor. Participants earn the spread and, in turn, feed liquidity back into money markets, making the facility a de facto circuit-breaker for funding strains.

3) Rate Corridor Reset:  Interest on reserves is now 3.90%, the overnight reverse-repo rate 3.75%, and the SRF ceiling 4% with a $ 500 billion cap — a standing safety net ready to flood cash if front-end rates spike.

4) QT Endgame:  Quantitative tightening ends on December 1.  MBS runoff continues, offset by T-bill purchases that leave bank reserves roughly neutral. The tweak trims only $ 20 billion a month, immaterial beside the $ 6.6 trillion balance sheet, and offers little relief to longer yields, since bill buying does nothing for duration risk.

Dollar: Positioning across FX remains net short USD, but investors are quietly cutting exposure as carry costs mount and conviction fades.

Europe: Europe pauses for breath now.  After eight rate cuts, the ECB finally has inflation near 2 %, giving it scope to pause without policy guilt. Option volatility in EUR/USD has sunk to a one-year low, signalling calm rather than confidence. A break below 1.1576 could invite a 1.1505 test, though fundamentals argue more drift than drama.

Asia: Trump–Xi theatre resumes today.  The pair meet today, with Chinese soybean imports, TikTok, and fentanyl-related tariffs on the agenda. Beijing’s COFCO Group’s purchase of 180,000 tons of US soybeans is the diplomatic equivalent of small talk — a gesture of goodwill that changes little. Frictions are expected to survive any deal.

Yen on Watch: Markets are rushing to rebuild USD/JPY longs, convinced the BoJ will stay dovish and policy normalisation remains distant. A decisive break above 153.30 opens the door to 155.20, while stops sit just below 151.50.
Sterling: Sterling weakened on politics, not prices.  Prime Minister Starmer’s refusal to renew his no-tax-hike pledge, citing worsening forecasts, damped sentiment just as BoE cut expectations for December crept higher. The OBR’s downgrade of productivity widens the fiscal hole by £ 20 billion. GBP/USD closed below 1.3250, breaking the midpoint of its 1.2712–1.3787 range and keeping momentum firmly south.

Emerging Markets: Rupee range holds.  End-month USD/INR shorts were covered, not rolled, suggesting near-term comfort between 87.70 and 88.70. After today’s fix, respite looks likely, with the familiar 88.35 a dollar still in play.

The Fed may talk data dependence, but today’s move showed dependence on conviction. Liquidity can be engineered; confidence cannot.

Daily Quip
In markets that crave clarity, even a safety net feels like a ceiling.