On December 19, 2023, at 3 a.mBeijing time, the Federal Reserve made a significant announcement that startled financial marketsThe central bank decided to lower its benchmark interest rate by 25 basis points, adjusting the target range for the federal funds rate from 4.5%-4.75% to 4.25%-4.50%. This marked a critical milestone, as it was the third consecutive rate cut after initiating an easing cycle in September 2024, amounting to a total reduction of 100 basis points over this period.

Following this announcement, Fed Chair Jerome Powell's press conference sent mixed signals regarding future monetary policyPowell indicated that the constraints of their policy stance had notably eased, suggesting that the Fed could adopt a more cautious approach regarding additional rate adjustmentsHe emphasized that there was no predetermined course for interest rates moving forward.

However, the market response was immediate and severe

Influenced by a series of "hawkish" signals, traders revised their expectations for future rate cuts downwardThe three major U.Sstock indices plunged, as the declines worsened throughout Powell's speechBy 4:30 a.m., the Dow Jones Industrial Average had fallen more than 1.5%, marking its potential tenth consecutive trading day of losses, a streak not seen since 1974. Meanwhile, the Nasdaq composite plummeted over 2.5%, and the S&P 500 index dropped by 1.88%.

The Federal Reserve announces a 25 basis point rate cut

This rate reduction was widely anticipated, as prior to the meeting, the CME Group's FedWatch Tool indicated that traders assigned a probability greater than 97% to the Fed pausing further rate hikesNevertheless, the decision was not unanimously supported within the Federal Open Market Committee (FOMC), with Cleveland Fed Officer Beth M

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Hammack voicing oppositionHammack was the second voting member this year to dissent, following a prior disagreement from Fed Governor Michelle Bowman in September regarding a larger cut.

Market analysts interpreted Hammack's unexpected dissent as a sign of fractures in the central bank's previously solid consensusThis apparent division among policymakers raises questions about the ease of future rate adjustments going forward.

Despite concerns regarding economic implications, many market participants had prepared for a 25 basis point cutFollowing the meeting, officials reiterated the necessity of assessing future economic data and risks accurately while considering interest rate adjustments.

Nick Timiraos, a journalist often dubbed the "Fed whisperer," noted that the policy statement's new language around "magnitude and timing" indicated a potential slowdown in the pace of future rate cuts, allowing for refinements in anticipated changes.

Insights from Powell

Almost immediately after the decision, Powell addressed the media, underscoring the importance of the Fed's dual mandate of supporting employment while controlling inflation

He reiterated that the FOMC's decision to reduce the policy rate by 25 basis points was aimed at diminishing policy restrictivenessAdditionally, he acknowledged the Fed's ongoing strategy to pare back its bond holdings.

Powell indicated that any remaining policy restrictions needed to be evaluated carefully, as delaying these adjustments too long could weaken economic growth and job markets excessivelyHe noted that overnight reverse repurchase agreement adjustments would not impact the overall policy stance.

Furthermore, Powell projected that core PCE inflation for November might rise to 2.8%, suggesting it could take additional years to reach the target inflation rate of 2%.

He characterized the labor market as cooling from previous overheating levels, with inflation levels edging closer to the long-term target

Despite some upticks in unemployment, the overall rate remained low, distancing itself from being a primary source of inflation pressure.

Analyzing the state of the economy, Powell highlighted weaknesses in the real estate sector but noted that consumer spending remained resilient, and economic activity continued to expand at a steady pace.

On the subject of tariffs and their implications, Powell stated that forming conclusions regarding their impact was prematureHe emphasized the uncertainty surrounding the targeted nations and the scale and duration of such tariffs.

During the press conference, Powell also remarked that the Fed's statement, with its added commentary on the "magnitude and timing" of rate adjustments, suggested that the central bank was nearing or had reached a point of slowing rate reductions.

With regards to the future of rate cuts, he asserted that a deceleration in the pace of rate reductions reflected the improved economic data seen this year, while projections for next year aligned with rising inflation expectations.

As a consequence of these developments, U.S

interest rate futures indicated a probability exceeding 90% for the Fed to maintain current rates in January 2024, compared to an 81% chance prior to the announcementThe latest Fed forecasts revealed that the median rate prediction for the end of 2025 stands at 3.875%, implying only two 25 basis-point cuts ahead, diverging from market expectations of 3.625%.

Market Reactions

In direct response to the Fed's rate decision, U.Sstock indices plummetedThe dramatic reversal came after a series of hawkish signals from the FedAmidst the declines, as Powell spoke, by 4:30 a.m., the Dow had dropped over 1.5%. This downward trend contributed to the potential for the stock market's longest streak of losses since 1974. Furthermore, the Nasdaq and the S&P 500 followed suit, experiencing significant declines.

The dollar index soared, achieving heights not seen since November 2022, while the yield on 10-year U.S

Treasuries climbed to a four-week peak of 4.486%. Conversely, non-U.Scurrencies dropped sharply, with the offshore yuan hitting its lowest point against the dollar in 2023.

Spot gold prices reacted quickly, briefly extending losses by up to $40 and resting at $2621.89 per ounce post-announcement.

According to Gennadiy Goldberg, head of U.Srates strategy at TD Securities, the Fed has sent a message indicating a shift away from previous dovish tendencies, signaling that there might be fewer rate cuts next year, leading the market to adjust pricing expectations accordingly.

As a seasonal meeting, the Federal Reserve additionally released its latest economic projections and dot plot graph, providing valuable insights for market players regarding future policy paths.

The latest dot plot median projections indicated a prediction of only two rate cuts at 25 basis points each in 2025. This message is a departure from the September expectations of four cuts at the same size, highlighting a notable shift in sentiment among Fed officials.

Overall, the predictions revealed that the outlook for unemployment rates in 2024 through 2026 is expected to hover near 4.2% to 4.3%, with PCE inflation forecasts exhibiting similar moderation, projecting numbers gradually decreasing towards the targets.