The Fed is cutting rates again, but Powell’s big surprise rattled the markets

The Federal Reserve delivered exactly the rate cut everyone expected, but then Chairman Jerome Powell threw the curve, sending stocks tumbling, bond yields soaring and the dollar soaring. What a whiplash!

Here’s what happened at yesterday’s FOMC meeting, how markets reacted, and what it all means for the dollar from here.

The expected version that became unexpected

Solution: As expected, the Federal Reserve cut interest rates by 0.25%, bringing the benchmark federal funds rate down to a range of 3.75% to 4.00%. This is the Fed’s second rate cut in 2025, following a similar quarter-point cut in September.

Why they cut: The Fed’s statement noted a slowdown in job gains and the unemployment rate, which rose to 4.3% by August, the highest level since 2021. In addition, the central bank stressed that “risks of a deterioration in employment have increased in recent months”, indicating that they are now more concerned about the labor market than inflation.

Turn: While inflation hit 3% in September, thanks in part to Trump’s import tariffs, the Fed decided that support for jobs was more necessary. The committee said “uncertainty about the economic outlook remains high” and noted concerns on both sides of its dual mandate.

Not unanimous: The vote was 10-2. Stephen Miron (a Trump appointee) wanted a bigger cut of 50 basis points, while Kansas City Fed President Jeffrey Schmidt wanted no cut at all. This split tells you how divided politicians are right now.

Powell’s bombshell: December is a ‘done deal’

This is where things got interesting. During the FOMC press conference, Powell immediately assessed expectations for another reduction in December.

“During the committee’s discussions at this meeting, there were very different opinions on how to proceed in December,” Powell said. “Further rate reduction at the December meeting is not predetermined. Far from it.â€

The phrase “far from it” is hitting the markets like a freight train.

Why caution? The Fed has been blindsided in part by the government shutdown that has halted nearly all official economic data releases since early October. Powell acknowledged that “if there’s a very high level of uncertainty, then that might be an argument for being cautious about moving.”

Before the shutdown, hiring had already slowed sharply, averaging just 29,000 jobs per month over the previous three months. But without jobs reports in September and October, the Fed relies on private sector data, consumer confidence surveys and a “beige book” of anecdotal economic reports.

How markets reacted: A wild day

Dollar Index, Gold, S&P 500, Oil, US 10-Year Yield, Bitcoin, Overlay Chart by TradingView

Initial response (14:00-14:30): Everything looked calm and well. Earlier in the day, stocks hit record highs and remained steady. Gold briefly touched $3,987 an ounce. The dollar was calm.

After Powell’s speech (2:30 p.m. onwards): Markets quickly turned around.

Actions:

• The S&P 500 closed up 0.3 points (essentially unchanged at 6,890), erasing earlier gains
• Only the Nasdaq held on for gains of 0.6% to close at 23,958, helped by gains in tech stocks such as Nvidia

Bond yield (great dynamics):

• The 10-year Treasury yield jumped 9.3 basis points to 4.076%, signaling that investors now expect fewer rate cuts
• The 2-year Treasury yield rose 10.2 basis points to 3.596%
• Bond prices fell as yields rose, with the benchmark 10-year rising from 3.98% earlier to more than 4.07% after Powell’s remarks.

US dollar:

• The dollar index (DXY) rose 0.45%, strengthening against major currencies
• The greenback got a boost from Powell’s cautious comments on easing in December
• EUR/USD and GBP/USD retreated as the dollar rose

gold:

• After an initial surge to $3,987 an ounce earlier in the day, gold returned to the $3,950-$4,010 range after the event
• The precious metal pared gains as Powell’s comments suggested a “potential slowdown in the pace of future easing”

What this means for the US dollar

Short term boost: Powell’s hawkish surprise immediately strengthened the dollar. When markets lower the rate, it makes the dollar more attractive because higher interest rates attract foreign investment into US assets.

The bigger problem is the picture: The dollar still faces significant headwinds:

1. The labor market is weakening. Even with the limited data, unemployment has risen from 4.0% to 4.3% this year and job creation has slowed sharply.
2. The Fed is still cutting. Despite Powell’s doubts in December, the central bank has cut rates twice this year and is clearly in a cycle of easing, not tightening.
3. Economic uncertainty is high. Government shutdowns, Trump’s tariff policies, geopolitical tensions, global trade developments (including the upcoming Trump-Xi summit) create volatility.

What to watch over the next few weeks

The next six weeks before the Fed’s December 10 meeting will be crucial. Here’s your watch list:

1. Jobs Report (November 7?)

The September jobs report is still delayed due to the shutdown. If and when it is released, it will probably be a game changer. Before the blackout, job gains fell to just 29,000 a month.

• Strong jobs data = stronger dollar, less chance of a December cut
• Weak jobs data = weaker dollar, more likely to cut in December

2. Inflation data (when shutdown ends)

The Consumer Price Index (CPI) for September was released late on October 24, showing inflation at 3%, still well above the Fed’s 2% target. After resuming normal data release:

• Monitor inflation trends
• Core inflation (excluding food and energy) will be particularly important.
• Any spike could make the Fed even more cautious about tapering

3. Trump-C summit

What actually happened: President Trump and Chinese President Xi Jinping wrapped up their much-anticipated meeting at Kimhae Air Force Base in Busan, South Korea. The 90-minute meeting, which Trump rated a “12 out of 10,” produced several significant results that beat market expectations.

Market implications for the dollar:

• Mixed signals: The success of a trade deal creates risk-on sentiment, which typically weakens the dollar as investors move into riskier assets
• However: The deals are only for one year, keeping the uncertainty
• Immediate influence: The combination of Fed Powell’s hawkish comments and trade deal optimism is creating cross-currents for the dollar

4. The government’s decision to stop work

The blackout lasted four weeks. When it ends:

• Expect a flood of delayed economic data
• Markets will likely revise Fed expectations based on actual numbers
• The direction of the dollar will depend heavily on what this data shows

5. Fed Speakers (Blackout Ends Today)

Analysts said the split between policymakers at the FOMC’s December meeting suggests that the resumption of members’ speeches could provide clearer clues about where they stand when it comes to the outlook for the data and potential policy changes.

In short, keep an eye on Fed officials over the next few weeks, as any hint of December is likely to move markets.

Bottom line

Yesterday’s Fed meeting was a textbook example of “buy the rumor, sell the news,” but in reverse. Markets got exactly what they expected (a 25 basis point cut), but were shocked by what they didn’t expect (Powell’s pushback on December easing).

For the US dollar, the picture is now more complicated. Powell’s caution about future rate cuts provided short-term support, but the successful Trump-X summit introduces a new dynamic. The trade deal is creating risk-on sentiment that could put pressure on the dollar, although the temporary nature of the accords keeps the underlying uncertainty alive.

What’s next? All eyes turn to:

• Implementation of the Trump-Xi agreements and whether they are being implemented
• Possible resumption of economic data releases
• Fed speakers are hinting at December in the coming weeks

The Fed meets again on December 10th, and from there we either get clarity or more chaos.

In uncertain times like these, risk management becomes even more important. The Fed just showed us that even when the results are “certain,” the market’s reaction can surprise you. Trade accordingly.