The Federal Reserve's December 2024 meeting cut interest rates by 25bps, in line with market expectations. The current dot plot shows that the central target interest rate for next year is 3.9%, higher than the 3.4% shown at the September 2024 meeting. At the same time, the inflation and economic growth forecasts for next year have been raised, and the unemployment rate forecast for next year has been lowered. Powell's speech did not provide clear guidance on the "degree and timing" of subsequent interest rate cuts, but he has strong confidence in economic growth. From SEP and Powell's speeches, it can be seen that the Federal Reserve has clear concerns about inflation next year. The current interest rate meeting is much more hawkish than the market's general expectation, but it is consistent with our view that the Federal Reserve will cut interest rates twice in 2025. We continue to maintain this view and expect that the Federal Reserve will most likely suspend interest rate cuts observation at the next meeting, or wait until the March meeting to provide clearer guidance. The volatility of the US stock market is expected to increase.
Key points of the statement from the December 2024 Federal Reserve interest rate meeting:
1) In terms of interest rate tools, the committee has decided to lower the target range for the federal funds rate to 4.25-4.5%, which is in line with market expectations. However, this interest rate decision did not receive unanimous agreement from FOMC members, and Cleveland Fed Chairman Hamack tends to maintain the interest rate unchanged.
2) In terms of balance sheet, the committee kept the pace of shrinking the balance sheet unchanged, with the monthly redemption ceiling of US treasury bond bonds of US $25 billion, and the monthly redemption ceiling of institutional debt and MBS of US $35 billion. Reduce the overnight reverse repo rate by 30 basis points and make a technical adjustment to align with the lower limit of the target range for the federal funds rate.
3) In terms of economic prospects, recent indicators indicate that economic activity continues to expand at a steady pace. Employment growth has slowed down and the unemployment rate has risen, but it remains low. The inflation rate is further moving towards the committee's target of 2%, but still somewhat high. The committee seeks to achieve maximum employment and a 2% inflation rate in the long term. The committee's confidence in inflation continuing to move towards 2% has increased, and it is judged that the risks of achieving employment and inflation targets are roughly balanced. The economic outlook is uncertain, and the committee notes the risks faced by both parties in its dual task.
4) The statement from the December 2024 Federal Reserve interest rate meeting is relatively small compared to the previous meeting, only stating that "when considering additional adjustments to the target range of the federal funds rate, the committee will carefully evaluate the incoming data, changing prospects, and risk balance." Instead, it will "when considering the extent and timing of additional adjustments to the target range of the federal funds rate, the committee will carefully evaluate the incoming data, changing prospects, and risk balance
The dot plot shows that the central target interest rate for next year is 3.9%, higher than the 3.4% shown at the September 2024 meeting. At the same time, the inflation and economic growth forecasts for next year have been raised, and the unemployment rate forecast for next year has been lowered.
The dot plot predicts a final interest rate of 3.9% by 2025, higher than the 3.4% given at the September meeting this year, implying a 50bps interest rate cut next year. From the specific types of votes in the dot matrix, there is 1 vote that believes that 4.25-4.5% will be maintained in 2025, 3 votes that believe there will be a 25bps interest rate cut, 10 votes for 50bps, 3 votes for 75bps, 1 vote for 100bps, and 1 vote for 125bps. In addition, it is worth noting that this dot plot has once again raised the long-term interest rate level from 2.9% to 3.0% (September SEP increased from 2.8% to 2.9%), indicating that the Federal Reserve has once again raised its assessment of the long-term neutral interest rate level. In terms of economic forecasting, compared to the September 2024 meeting, this meeting slightly raised the GDP growth forecast for 2025 and lowered the unemployment rate forecast for next year. In terms of inflation forecast, the year-on-year growth rate of PCE for next year will be raised from 2.1% in September to 2.5%, and the year-on-year growth rate of core PCE will be raised from 2.2% in September to 2.5%.
Powell's speech did not provide clear guidance on the "degree and timing" of subsequent interest rate cuts, indicating strong confidence in economic growth but insufficient confidence in inflation.
Firstly, on the issue of interest rates, Powell did not provide clear guidance on the "degree and timing" of the newly added interest rate cuts in this meeting statement. In terms of degree, he stated that the current SEP showing two interest rate cuts next year is not certain to be achieved, and there is almost no incremental information on the timing. When discussing the issue of interest rates, Powell mentioned four factors: economic growth, job market, inflation, and neutral interest rate. He believes that approaching neutral interest rate is one of the reasons why interest rate cuts have become cautious. However, when asked about the level of neutral interest rate, Powell did not provide a clear answer. Additionally, Powell stated that it is unlikely to raise interest rates in 2025. Secondly, in terms of the job market and economic growth, Powell's description of economic growth is very good and remarkable, indicating that the job market is moderately weakening, the current situation is not as tense as in 2019, and the downside risk of the job market has weakened. Finally, on the issue of inflation, Powell extensively reviewed the progress made in inflation and stated that it may take another year or two to reach the 2% inflation target. From his speech, he lacked confidence in the inflation outlook and made a rare horizontal comparison, stating that other countries are also facing inflation problems. After being asked by reporters, he used the word "confidence" to indicate that "inflation is on a downward trajectory towards the 2% target." SEP forecasts also show that achieving the 2% inflation target will be postponed from 2026 to 2027.
From SEP and Powell's speeches, it can be seen that the Federal Reserve has obvious concerns about inflation next year. This interest rate meeting is much more hawkish than the market's general expectations, but it is consistent with our view that the Federal Reserve will cut interest rates twice in 2025. We will continue to maintain this view.
Firstly, the market's expectation for this meeting is a hawkish cut in interest rates. However, the information presented at this meeting is clearly much more hawkish than the market's expectation. On the one hand, the 10 voting committee members only expect to cut interest rates twice next year, which is in line with our judgment in "Outlook for Overseas Macro and Large Asset Allocation in 2025- 'Changes' and' Unchanged 'After the US Election" (2024-11-12), but is more hawkish than the general view in the market that the dot matrix will show three interest rate cuts. Secondly, the significant increase in inflation in this SEP is greater than the increase in economic growth rate, indicating the Federal Reserve's concern about inflation, and also in line with our statement in the "Review of the Federal Reserve's November 2024 Interest Rate Meeting - Uncontrollable Inflation Concerns" (2024-11-08) that "the relative importance of inflation and unemployment rates in the eyes of the Federal Reserve may flip again, and Trump and his inflation expectations may become unavoidable concerns." Powell believes that the hawkish message of this meeting comes from concerns about next year's inflation as the risk of a downturn in the job market weakens and economic growth is stronger than previously expected. Thirdly, the reporter asked whether the absence of the term "recalibration" in this speech indicates a new stage. We believe that from Powell's speech this time, it is clear that the Federal Reserve has entered a new stage, a stage of relative ambiguity and unclear forward guidance, which is a more unfavorable signal for the market than the dot matrix chart showing a 25 basis point interest rate cut less than market expectations.
It is expected that the Federal Reserve will most likely pause its interest rate cut observation at the next meeting, or wait until the March meeting to provide clearer guidance, and volatility in the US stock market is expected to increase.
After the announcement of the December interest rate decision, the US stock market fell sharply, with the Nasdaq falling 3.56%, the S&P 500 falling 2.95%, the Dow Jones Industrial Average falling 2.58% (10 consecutive days of decline), the US dollar index rising above 108, and the 10Y and 2Y US bond rates jumping sharply. In the short term, with unclear guidance from the Federal Reserve, the optimistic "holiday trading" sentiment in the US stock market may come to an end, and market volatility is expected to increase. The next FOMC meeting will be on January 29th US time, shortly after Trump's inauguration. With little change in economic data, we expect the Federal Reserve to pause interest rate cuts at that time. The Fed may need to wait until the FOMC meeting in March to provide clearer guidance.