【MACRO Insight】The market reacted strongly to the Fed’s third rate cut, and expectations for future

At the policy meeting on December 19, the U.S. Federal Reserve (Fed) announced its third interest rate cut this year, a 25 basis point cut, adjusting the federal funds rate target range to 4.25%-4.5%. This decision was in line with market expectations, bringing the Fed's cumulative interest rate cuts this year to 100 basis points.

The rate cut was supported by 11 of the 12 Federal Open Market Committee (FOMC) members, with Cleveland Fed President Hammack voting against it, preferring to keep interest rates unchanged. In its policy statement, the Fed emphasized that it will carefully evaluate the latest data, the changing outlook, and the balance of risks to determine additional adjustments to the federal funds rate target range in the future . It is worth noting that the latest dot plot shows that the Fed expects to cut interest rates twice in 2025, a decrease from the four times expected in September.

In addition, Fed officials now expect inflation to reach the 2% target level in 2027, which is later than the previous expectation of 2026. This change shows that the Fed has extended the timeline for achieving inflation targets and is more cautious about the pace of future interest rate cuts. The addition of the wording “magnitude and timing” to the Fed's policy statement was interpreted by the market as a signal that the pace of interest rate cuts may be slowed down.

Analysts believe that the Fed's forecast for next year is more hawkish than expected, with the median forecast of Fed officials currently predicting only two rate cuts next year, while most market forecasts are three. This forecast is consistent with the expectation that the Fed may pause in January because the Fed needs time to assess the economic situation and the impact of any new policies introduced by the new president.

Goldman Sachs economists estimate that tariffs implemented after Trump took office could push core inflation up by 0.3 percentage points next year, and while most of the impact will fade by 2026, this could cause discomfort within the central bank because it would cause inflation to be meaningfully above the 2% target within five years.

Fed Chairman Powell said at a press conference that the labor market is still in a delicate balance, with low hiring rates but also low layoffs, and strong consumption supported by income growth. Fed officials have been looking for signs of a steady pace of job growth to keep the unemployment rate stable. The market will get more clues from Powell's answers on the future path of rate cuts, changes in the wording of the statement, economic fundamentals, and the impact of the new government.

During Powell's speech, the US dollar index stood at 108, a new high since November 22, and rose by more than 1% on the day. Spot gold fell below the integer mark of $2,600 per ounce for the first time since November 18, and fell sharply by nearly $60 unilaterally during the session, and the intraday decline widened to more than 2%.

The yield on the 10-year U.S. Treasury bond reached its highest level since the end of May, rising 11.3 basis points to 4.5% during the day. Bitcoin fell more than 4% during the day. The three major U.S. stock indexes continued to fall, with the Nasdaq falling more than 3% in late trading and the S&P 500 falling more than 2% (this was the largest drop in the S&P 500 on the day of the Federal Reserve's interest rate decision since 2001). The Dow fell more than 1,000 points and closed down 2.59%, falling for the 10th consecutive trading day. This is the longest single-day streak of declines for the Dow since it fell for 11 consecutive trading days in October 1974.

The latest summary of quarterly economic projections shows that Fed policymakers expect the Fed's target inflation rate to reach 2.5% in 2025, higher than the previous estimate, and inflation to reach 2% in 2027, later than the previous expectation of 2026. The report also showed that policymakers expect economic growth to be slightly stronger next year than expected three months ago, and the unemployment rate will also fall. This shows that despite the uncertainty, policymakers remain cautiously optimistic about economic growth and the job market.

Overall, the Fed's latest decisions and forecasts show a prudent assessment of current economic conditions and flexible adjustments to future policy paths. As the new government's policies gradually become clear, the Fed's pace of interest rate cuts and inflation expectations may be further adjusted. The Fed will continue to monitor economic data and global developments to ensure that its monetary policy decisions are consistent with the goals of achieving maximum employment and price stability.