WHY a 25bp CUT IS MORE DOVISH THAN IT LOOKS

When the Federal Reserve delivers a 25 basis point cut after an extended period of restrictive policy, the market's instinct is to evaluate it as dovish. That is often wrong. The signal value of a cut depends entirely on its context: whether it is accompanied by projections that raise or lower the terminal rate; whether it is framed as the first in a sequence or a one-and-done recalibration; and whether it is delivered from a position of inflation confidence or inflation anxiety.

A 25bp cut from a Committee that simultaneously raises its 2026 growth projection, lowers its unemployment projection and holds the longer-run dot at 2.75 percent is not a dovish cut. It is a competence signal: the Committee believes the economy can absorb lower short-term rates without reigniting inflation. That is a very different animal from a 25bp cut delivered because the labour market has weakened and the Committee is behind the curve.

The desk's general framework: evaluate the cut in the context of the three P's: projections (what did the SEP show), posture (what did the Chair signal about sequencing) and positioning (how was the market positioned going in). All three matter more than the arithmetic of 25 basis points.

The desk ran a base-rate analysis of every FOMC first-cut episode since 1984. The sample includes eight distinct first-cut episodes: 1984, 1989, 1995, 1998, 2001, 2007, 2019 and 2024.

The most relevant comparison for the current cycle is 1995. The Fed cut in July 1995 after a 300bp hiking cycle, without a recession, with inflation under control and employment still strong. The cut was 25bp. The signal was normalisation from overshoot. The subsequent path was three additional 25bp cuts over 12 months, bringing the terminal rate to 5.25 percent from a peak of 6.00 percent. The equity market rallied 30 percent over the following 12 months.

The 2019 comparison is also instructive. The Fed cut in July, September and October 2019, three cuts of 25bp each. These were characterised as 'insurance cuts' against the global trade shock. Inflation was stable. The equity market hit new highs through the cutting cycle. The cuts were unambiguously dovish in signal despite being modest in scale.

The 2024 to 2026 cycle looks more like 1995 and 2019 than like 2001 or 2007, which involved cutting into recession. That matters: first cuts in non-recessionary contexts have a better equity market track record than first cuts into recession, which tend to be overwhelmed by the negative earnings signal.

Chair Powell has developed a distinctive communication style that treats the press conference as a tool for managing the term premium rather than for transmitting rate decisions, which are already known before he speaks. The press conference matters for the long end of the curve, not the short end.

In the September 2026 press conference, Powell used the phrase 'recalibration' to describe the cut four times. He explicitly avoided the phrase 'beginning of an easing cycle' while also refusing to commit to a pause. That deliberate ambiguity is characteristic of a Committee that wants optionality: it does not want to pre-commit to a full easing path because it is uncertain about the inflation trajectory, but it also does not want to be seen as a one-and-done cutter if the labour market continues to soften.

For asset markets, deliberate ambiguity in central bank communication is generally bullish in a context where the prior positioning is defensively short: the range of outcomes is narrowed toward the centre, removing the tail risk that was being hedged.

The cross-asset read on a dovishly-delivered 25bp cut in a non-recessionary environment is well-established: equities up, short rates down, curve steepens, USD weakens modestly. That template held in September 2026.

The nuance is in the relative magnitude. Equities tend to overshoot the fundamental warrant on the first cut as positioning normalises. The September 2026 equity rally of 0.9 percent on the day was the first move in what the market expected to be a multi-month re-rating, but it also left equity multiples at 22x forward earnings in the S&P 500, a level that prices more than the base-case cutting path.

For fixed income, the first cut produced the largest front-end move, as expected. The 2-year fell 12bp. The 10-year moved only 4bp. The curve steepened to its flattest-positive since mid-2022.