In the early hours of December 19, Beijing time, the Federal Reserve announced a 25 basis point cut in interest rates, lowering the target range for the federal funds rate from 4.5%-4.75% to 4.25%-4.5%. This marks the third consecutive reduction by the Fed in their last three meetings, following cuts in September and November, bringing the total decrease for the year to 100 basis pointsThe implications of this decision ripple through the financial markets, influencing everything from borrowing costs to stock prices.
In addition to the rate cut, the Federal Open Market Committee (FOMC) statement revealed adjustments in other interest rates, including a drop in the primary credit rate from 4.75% to 4.50%, a decrease in the overnight reverse repurchase agreement rate from 4.55% to 4.25%, and a reduction in the discount rate from 4.75% to 4.50%. These changes reflect a broader monetary policy approach as the central bank navigates a complex economic landscape.
Federal Reserve Chair Jerome Powell pointed out that the updated wording concerning the timing and magnitude of rate adjustments suggests the Fed is either at or nearing a point where they will slow the pace of interest rate cuts
The deceleration in rate cuts mirrors improving economic data observed throughout the yearPowell further noted that next year’s rate adjustment will largely depend on incoming data, taking into account rising inflation expectations.
Interestingly, the Cleveland Fed's Loretta Mester voiced dissent in the FOMC's decision, pushing for no rate cuts, highlighting that there are differing opinions even within the committee.
The Fed's post-meeting announcement indicated that recent indicators show the economy continues to expand at a robust paceLabor market conditions have generally eased, with an uptick in the unemployment rate; however, it remains at historically low levelsInflation is gradually moving towards the committee's goal of 2%, but it has not yet fully receded.
The Fed aims for a long-term inflation target of 2% while maximizing employment opportunitiesThe committee assesses that the risks tied to achieving these goals are relatively balanced
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Given the uncertainties surrounding economic prospects, the Fed remains vigilant about the potential risks to both aspects of its dual mandate.
Recent statistics have shown that the Consumer Price Index (CPI) in the U.Srose by 2.7% year-over-year in November, aligning with market expectations but remaining above the Fed’s targetThe core CPI also increased by 3.3%. Economists are closely monitoring the Personal Consumption Expenditures (PCE) price index, which is expected to provide crucial data later this week and is highly regarded by the Fed.
Following the Fed's announcement, the dollar index surged sharplyHowever, U.Sstock indices experienced significant declines, with the Dow Jones Industrial Average marking its tenth consecutive drop, the longest losing streak since 1974. Major tech stocks faced steep losses—Tesla plummeting over 8%, Amazon dropping more than 4%, and other giants like Google, Meta, and Microsoft also reporting declines of over 3%.
Cryptocurrency-related stocks followed suit, with a dramatic downturn after Powell remarked that the central bank would not hold Bitcoin and has no intentions of seeking legal reforms to do so
Speculation swirls around the potential of a new government possibly acquiring Bitcoin-related stocks, but for now, the virtual currency market is experiencing even steeper losses, with Bitcoin dropping over 5% and nearing the $100,000 markEthereum and Dogecoin likewise saw significant dipsLiquidations exceeded 250,000 positions in the market.
Spot gold and silver have continued to decline, disappointing investors looking for safe havensMeanwhile, the yields on U.STreasuries for two-year and ten-year notes have increased, reflecting the market's response to the Fed's latest actions.
This rate cut was largely anticipated; the focus now shifts to the degree and frequency of potential rate cuts in the coming yearThe dot plot projections indicate that two rate cuts are anticipated by 2025, down from the previously projected four in September, underscoring what some analysts refer to as a “hawkish rate cut.”
The Fed signaled that it would meticulously evaluate the latest data, shifting trends, and the balance of risks when considering further adjustments to the federal funds rate target range
Nick Timiraos, often referred to as the “Fed whisperer,” indicated that the inclusion of the terms “magnitude and timing” in the Fed’s statement hints at a potential slowdown in the rate-cutting momentum, allowing for adjustments as necessary.
As of December 18, traders utilizing the Chicago Mercantile Exchange's FedWatch tool estimate that there is only a 16.3% probability of another cut to 4.00%-4.25% in JanuaryThis reflects a broader market opinion that the Fed is likely to pause its rate-cutting cycle next month.
Many Fed officials have hinted that they want to see clearer evidence indicating that inflation is on the verge of improvement or that the labor market is deteriorating before they consider further cuts in borrowing costsMester has explicitly articulated that the Fed may already be at the point where it should slow the pace of rate reductions, reminiscing about the rapid cuts made in the 1990s during similar economic conditions.
Goldman Sachs Chief Economist Jan Hatzius echoed these sentiments in a recent report, suggesting that the Fed is expected to taper its rate cuts moving forward
He revised his expectations about the Fed’s January rate decisions and now anticipates three cuts across March, June, and September instead.
Shortly after the Fed announced its rate cut, the Central Bank of Qatar reduced its deposit rate by 30 basis points, continuing the trend of multiple major economies announcing rate reductions throughout DecemberThe Bank of Canada slashed its rate by 50 basis points on December 11, while the European Central Bank decreased its rate by 25 basis points on December 12, marking its fourth cut this yearOn the same day, the Swiss National Bank made a surprising decision to cut rates by 50 basis points, bringing its benchmark rate to 0.5%, the most aggressive cut since January 2015. Other nations, including Pakistan and Morocco, followed suit with their own cuts, reflecting widespread coordination among various central banks aiming to stabilize their economies amid challenging conditions.
The Bank of England is expected to maintain its policy rate at 4.75% this Thursday, reflecting a cautious approach as it continues a gradually progressive interest-rate trimming strategy
Meanwhile, expectations for the Bank of Japan increasing their rates are growing, with economists forecasting a possible quarter-point increase to 0.5%, although this may be deferred until January or later.
The collective rate cuts among various central banks share a common backdrop of inflation deceleration toward targets, coupled with weak economic growthMoreover, uncertainties related to potential trade tensions with the United States may complicate economic outlooks for these nations, leading central banks to lean toward more dovish monetary policies aimed at supporting their economiesIn contrast, the U.Seconomy demonstrates considerable resilience, and recent inflation rebounds create apprehensions regarding further inflationary risksThis situation complicates the Fed's route towards rate cuts, resulting in a policy landscape characterized by fluctuations between hawkish and dovish stances, amplifying uncertainties in the financial environment.