Powell's pre-Christmas "Dancing on a Knife's Edge": Whether to cut rates or not, he'll offend people; dollar bulls await a dramatic reversal.
2025-11-25 22:09:09
Despite widespread market expectations of an 81% probability of a Federal Reserve rate cut in December, the US dollar index remains relatively high. This seemingly contradictory phenomenon has attracted market attention. Analysts point out that the dollar's resilience is rooted in the performance of the US economic fundamentals. The Federal Reserve Bank of Atlanta predicts that US GDP growth will accelerate to 4.2% in the third quarter from 3.8% in the second quarter. The Bureau of Labor Statistics plans to release GDP data for July to September before Christmas, and this economic report is expected to exceed market expectations.
Looking back at market movements in September and October, a noteworthy phenomenon is worth noting: despite the Federal Reserve's interest rate cut in September, the US dollar index actually rose. This seemingly unusual market reaction stemmed from the Federal Open Market Committee's reduction of its expectations for future rate cuts when updating its forecasts. The market's reassessment of the policy outlook outweighed the immediate impact of a single rate cut.
History may be repeating itself for the third time in December. Federal Reserve Chairman Jerome Powell faces the challenge of striking a delicate balance between hawkish and dovish committee members. Analysts expect Powell to cut interest rates in response to market expectations, but at the same time, he will send a stronger signal suggesting a pause in further easing, at least in the near term. This policy communication strategy aims to avoid creating excessively loose expectations in the market, while preserving policy flexibility for the future. It is worth emphasizing that the dollar's performance is profoundly influenced by expectations of key interest rates over the next two years, and traders often look beyond the decisions of a single meeting. Therefore, even if a rate cut occurs in December, as long as the Fed conveys a cautious medium- to long-term policy stance, the dollar can remain strong.
Federal Reserve Governor Stephen Milan expressed support for a December rate cut on Tuesday. His core arguments included: the current economic situation demands a significant rate cut; rising unemployment reflects overly tight monetary policy; and the Fed should quickly return to a neutral interest rate level. Milan emphasized that while he is concerned about rising living costs, Fed policy must be forward-looking. He hopes the upcoming employment data will convince other Fed members to support a December rate cut. However, he also acknowledged the difficulty in quantifying the precise impact of artificial intelligence on the economy. This statement provides an important window into the market's interpretation of internal divisions within the Fed.
However, if market movements depended solely on Federal Reserve policy, investment analysis would be far simpler. In reality, the Trump factor and changes in economic fundamentals have added extra uncertainty to the market. The US president will not abandon his efforts to weaken the dollar, a political intention that could conflict with the Fed's monetary policy objectives. More importantly, economic factors are beginning to emerge, and their impact has not yet been fully recognized by the market.
September retail sales data revealed subtle shifts in consumer spending. Data released by the U.S. Census Bureau on Tuesday showed that retail sales rose 0.2% month-over-month in September, reaching $733.3 billion. This increase was not only lower than August's 0.6%, but also failed to meet market expectations of 0.4%. Looking at a longer timeframe, total retail sales from July to September 2025 are projected to grow 4.5% year-over-year. Excluding auto sales, retail trade sales rose 0.1% from August, and increased 3.9% year-over-year. This slowdown in the data has raised concerns about the sustainability of consumer momentum.
The context of this report's release is also noteworthy. Following a 43-day government shutdown, federal agencies are working overtime to process the backlog of data releases. The September retail sales report was released more than two months later than usual, and this information lag increases the complexity of policymaking and market decisions. The importance of retail consumption data is self-evident; it is not only a key indicator of consumer spending but also a major contributor to US GDP. Furthermore, retail sales are a core consideration in the Federal Reserve's monetary policy decisions because they can foreshadow future inflation trends.
Regarding inflation indicators, the latest data released by the Bureau of Labor Statistics shows that the Producer Price Index (PPI) rose 2.7% year-on-year in September, largely in line with market expectations and slightly higher than August's 2.6%. The core PPI, excluding food and energy, rose 2.9% year-on-year, exceeding the expected 2.7% and also higher than the previous value of 2.8%. On a month-on-month basis, the overall PPI rose 0.3%, and the core PPI rose 0.1%. These data indicate that although inflationary pressures have eased somewhat, they have not completely subsided, and the Federal Reserve still needs to remain cautious in its policy adjustments.
Labor market data is sending a more complex signal. A report released Tuesday by Automatic Data Processing (ADP) showed that private sector employers laid off an average of 13,500 people per week in the four weeks ending November 8. ADP's chief economist, Nera Richardson, noted, "With consumer strength still uncertain as we head into the holiday hiring season, this could lead businesses to postpone or cut back on hiring plans." This observation reveals businesses' cautious outlook on the economy and explains why the job market is showing signs of weakness alongside slowing consumer spending data.
Based on various sources, the current US economy presents a complex and nuanced picture. On the one hand, the accelerating overall economic growth provides support for the US dollar. On the other hand, slowing retail sales, signs of weakness in the job market, and political uncertainty constitute potential risk factors.
The Federal Reserve faces a formidable policy dilemma. Cutting rates too quickly could reignite inflation expectations, undermining hard-won price stability. Cutting rates too slowly or insufficiently could exacerbate the risk of an economic slowdown, especially given the existing pressures on consumption and employment. Powell and his colleagues need to find the right balance between these two extremes.
The delicate balance of the Fed's policy path
Looking back at market movements in September and October, a noteworthy phenomenon is worth noting: despite the Federal Reserve's interest rate cut in September, the US dollar index actually rose. This seemingly unusual market reaction stemmed from the Federal Open Market Committee's reduction of its expectations for future rate cuts when updating its forecasts. The market's reassessment of the policy outlook outweighed the immediate impact of a single rate cut.
History may be repeating itself for the third time in December. Federal Reserve Chairman Jerome Powell faces the challenge of striking a delicate balance between hawkish and dovish committee members. Analysts expect Powell to cut interest rates in response to market expectations, but at the same time, he will send a stronger signal suggesting a pause in further easing, at least in the near term. This policy communication strategy aims to avoid creating excessively loose expectations in the market, while preserving policy flexibility for the future. It is worth emphasizing that the dollar's performance is profoundly influenced by expectations of key interest rates over the next two years, and traders often look beyond the decisions of a single meeting. Therefore, even if a rate cut occurs in December, as long as the Fed conveys a cautious medium- to long-term policy stance, the dollar can remain strong.
Federal Reserve Governor Stephen Milan expressed support for a December rate cut on Tuesday. His core arguments included: the current economic situation demands a significant rate cut; rising unemployment reflects overly tight monetary policy; and the Fed should quickly return to a neutral interest rate level. Milan emphasized that while he is concerned about rising living costs, Fed policy must be forward-looking. He hopes the upcoming employment data will convince other Fed members to support a December rate cut. However, he also acknowledged the difficulty in quantifying the precise impact of artificial intelligence on the economy. This statement provides an important window into the market's interpretation of internal divisions within the Fed.
Consumer data reveals complex signals
However, if market movements depended solely on Federal Reserve policy, investment analysis would be far simpler. In reality, the Trump factor and changes in economic fundamentals have added extra uncertainty to the market. The US president will not abandon his efforts to weaken the dollar, a political intention that could conflict with the Fed's monetary policy objectives. More importantly, economic factors are beginning to emerge, and their impact has not yet been fully recognized by the market.
September retail sales data revealed subtle shifts in consumer spending. Data released by the U.S. Census Bureau on Tuesday showed that retail sales rose 0.2% month-over-month in September, reaching $733.3 billion. This increase was not only lower than August's 0.6%, but also failed to meet market expectations of 0.4%. Looking at a longer timeframe, total retail sales from July to September 2025 are projected to grow 4.5% year-over-year. Excluding auto sales, retail trade sales rose 0.1% from August, and increased 3.9% year-over-year. This slowdown in the data has raised concerns about the sustainability of consumer momentum.
The context of this report's release is also noteworthy. Following a 43-day government shutdown, federal agencies are working overtime to process the backlog of data releases. The September retail sales report was released more than two months later than usual, and this information lag increases the complexity of policymaking and market decisions. The importance of retail consumption data is self-evident; it is not only a key indicator of consumer spending but also a major contributor to US GDP. Furthermore, retail sales are a core consideration in the Federal Reserve's monetary policy decisions because they can foreshadow future inflation trends.
Regarding inflation indicators, the latest data released by the Bureau of Labor Statistics shows that the Producer Price Index (PPI) rose 2.7% year-on-year in September, largely in line with market expectations and slightly higher than August's 2.6%. The core PPI, excluding food and energy, rose 2.9% year-on-year, exceeding the expected 2.7% and also higher than the previous value of 2.8%. On a month-on-month basis, the overall PPI rose 0.3%, and the core PPI rose 0.1%. These data indicate that although inflationary pressures have eased somewhat, they have not completely subsided, and the Federal Reserve still needs to remain cautious in its policy adjustments.
Labor market data is sending a more complex signal. A report released Tuesday by Automatic Data Processing (ADP) showed that private sector employers laid off an average of 13,500 people per week in the four weeks ending November 8. ADP's chief economist, Nera Richardson, noted, "With consumer strength still uncertain as we head into the holiday hiring season, this could lead businesses to postpone or cut back on hiring plans." This observation reveals businesses' cautious outlook on the economy and explains why the job market is showing signs of weakness alongside slowing consumer spending data.
Prospects and risks intertwined
Based on various sources, the current US economy presents a complex and nuanced picture. On the one hand, the accelerating overall economic growth provides support for the US dollar. On the other hand, slowing retail sales, signs of weakness in the job market, and political uncertainty constitute potential risk factors.
The Federal Reserve faces a formidable policy dilemma. Cutting rates too quickly could reignite inflation expectations, undermining hard-won price stability. Cutting rates too slowly or insufficiently could exacerbate the risk of an economic slowdown, especially given the existing pressures on consumption and employment. Powell and his colleagues need to find the right balance between these two extremes.
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