Due to Federal Reserve Chair Jerome Powell's less hawkish-than-expected remarks during the press conference and the Fed's announcement of purchasing $40 billion in short-term Treasury bills monthly starting December 12, the dollar declined while U.S. Treasuries and precious metals rallied. Data showed the U.S. Dollar Index (DXY) fell 0.59% to 98.64, while the Bloomberg Dollar Spot Index dropped 0.4%, marking its largest single-day decline since September 16.
U.S. Treasury yields across all maturities retreated from multi-month highs. The policy-sensitive 2-year yield fell to 3.524%, and the 10-year yield dropped to 4.14%. As the dollar and yields weakened, precious metals gained, with spot gold rising to $4,232.90 per ounce and silver climbing to $61.90 per ounce.
The Federal Open Market Committee (FOMC) cut interest rates by 25 basis points to a range of 3.5%-3.75%, as widely anticipated, with a 9-3 vote. The committee also adjusted its statement language, signaling greater uncertainty about future rate cuts. Powell noted that current policy adjustments aim to stabilize a softening labor market while maintaining sufficiently restrictive conditions to curb inflation. He emphasized that tariff-related price pressures are likely temporary and reiterated the Fed's 2% inflation target.
Powell stated that policy adjustments since September have brought rates within a neutral range, allowing flexibility in determining further moves based on economic data and risks. The median Fed projections for the federal funds rate remained unchanged at 3.4% by end-2026 and 3.1% by end-2027, though Powell stressed these are not predetermined plans.
Despite the Fed's projection implying only one 2026 rate cut, traders are pricing in two cuts next year, with expectations for reductions in June and Q4. Analysts noted Powell's tone was more dovish than anticipated, with some describing the Fed's updated outlook as leaning dovish.
Crucially, the Fed announced a liquidity measure—monthly purchases of $40 billion in Treasury bills—to replenish bank reserves depleted during quantitative tightening (QT). The Fed clarified this is a reserve management tool, not a return to quantitative easing (QE), though markets interpreted it as a liquidity boost supportive of asset prices.
TD Securities highlighted the move as "mini QE-like," while Manulife noted gold could remain well-supported into early 2026, especially if a perceived dovish Fed chair is appointed next May.
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