In the early morning of Thursday (December 19th) Beijing time, the Federal Reserve announced a 25 basis point interest rate cut, lowering the target range for the federal funds rate from 4.5% to 4.75% to 4.25% to 4.5%. This is also the third consecutive meeting of the Federal Reserve to announce a rate cut after September and November, bringing the cumulative rate cut for the year to 100 basis points.
In addition, the Federal Reserve FOMC announced that it will lower the Tier 1 credit rate from 4.75% to 4.50%, the overnight reverse repo rate from 4.55% to 4.25%, and the discount rate from 4.75% to 4.50%.
Federal Reserve Chairman Powell stated that the addition of language regarding the "magnitude and timing" of interest rate adjustments in the FOMC statement indicates that the Fed is at or near the point of slowing down interest rate cuts. The slowing pace of interest rate cuts reflects the upward trend of economic data this year; The slowdown in the pace of interest rate cuts next year reflects an increase in inflation expectations, and a decision on interest rate cuts will be made based on data next year.
The Federal Reserve's FOMC statement shows that Cleveland Fed Chairman Hamack opposes the interest rate decision and supports not cutting interest rates.
Why cut interest rates?
The Federal Reserve stated in a post meeting announcement that recent indicators indicate that economic activity continues to expand at a steady pace. Since the beginning of this year, the labor market situation has generally eased, and the unemployment rate has increased, but it is still at a low level. The inflation rate has made progress towards achieving the committee's 2% target, but remains high.
The Federal Reserve seeks to achieve maximum employment and inflation at a rate of 2% in the long term. The committee judges that the risks of achieving its employment and inflation targets are roughly balanced. The economic outlook is uncertain, and the committee is closely monitoring the risks of its dual task to both parties.
Data shows that the US CPI rose by 2.7% year-on-year in November, which is in line with market expectations and still higher than the Federal Reserve's target of 2%. The previous value was 2.6%, maintaining the trend of last month's rebound; The core CPI in the United States rose by 3.3% year-on-year in November, which was in line with market expectations and the previous value was 3.3%. The personal consumption expenditure price index (PCE), which the Federal Reserve is more concerned about, will be released on Friday. Economists predict that the US core PCE will rise by 0.2% month on month in November, the smallest increase in three months.
The US dollar soared instantly
After the Federal Reserve announced a rate cut, the US dollar index surged sharply, and the offshore renminbi fell to 7.3196 yuan per US dollar, the lowest since 2023.
The three major stock indices of the US stock market experienced short-term declines.
Quantum Computing, a quantum concept stock, continues to rise and is currently up over 40%. The stock took off flat on November 13th and as of December 17th, it has risen more than 10 times. Since November, DWave Quantum, also a quantum concept stock, has risen 8 times; Rigetti Computing has also increased tenfold in the past two months.
Due to the possibility of merging with Honda, Nissan Motor Company's (ADR) intraday gains have expanded to around 20%, marking the largest increase in 26 years.
Spot gold and silver continue to decline.
The yield of two-year treasury bond bonds rose sharply in the short term, and the yield of 10-year treasury bond bonds rose in the short term.
In Europe, most major stock indices have risen.
Will the Federal Reserve be more cautious about future interest rate cuts?
The Federal Reserve's interest rate cut this time is expected by the market, and the magnitude and frequency of interest rate cuts next year have become the focus of attention.
The dot plot shows that interest rate cuts are expected to occur twice in 2025, compared to four in September. That is to say, there has been a so-called 'hawkish interest rate cut' this time.
The Federal Reserve stated that when considering the magnitude and timing of additional adjustments to the target range of the federal funds rate, the committee will carefully evaluate the latest data, the constantly changing outlook, and the balance of risks.
According to Caixin News Agency, Nick Timiraos, the "voice tube" of the Federal Reserve, stated that the addition of the phrase "magnitude and timing" in the Fed's policy statement implies a slowdown in the pace of interest rate cuts to modify potential adjustments.
On December 18th local time, the Chicago Mercantile Exchange's Federal Reserve Watch tool showed that traders currently expect a probability of only 16.3% for the Fed to further cut interest rates to 4.00% -4.25% in January. This also means that market investors generally believe that the Federal Reserve will pause the pace of interest rate cuts in January next year.
According to Securities Times, some Federal Reserve officials have actually begun to suggest that they need to see more concrete evidence that inflation is improving or the labor market is deteriorating before continuing to lower borrowing costs. Cleveland Fed President Beth Hammack said earlier this month, "We have reached or are close to the point where we should slow down the pace of interest rate cuts." She praised two rate cuts in the 1990s, when the Fed quickly cut rates, with a cumulative rate cut of 0.75 percentage points, and then turned to wait-and-see.
Goldman Sachs Chief Economist Jan Hatzius stated in his latest report that the Federal Reserve expects to slow down the pace of interest rate cuts in the future. He also deleted the expectation of the Federal Reserve cutting interest rates in January next year in the report, and predicted that the Fed would cut interest rates three times in March, June, and September next year.
The global wave of easing is sweeping in
Shortly after the Federal Reserve announced a rate cut, Qatar's central bank lowered its deposit rate by 30 basis points.
Since December, several major economies have announced interest rate cuts.
On December 11th local time, the Bank of Canada lowered interest rates by 50 basis points.
On December 12th, the European Central Bank cut interest rates by 25 basis points, marking its fourth rate cut this year.
On December 12th, the Swiss National Bank unexpectedly announced a 50 basis point interest rate cut, lowering the benchmark interest rate to 0.5%, only 50 basis points away from zero interest rate. This is also the largest interest rate cut by the Swiss National Bank since January 2015.
On December 16th, the Central Bank of Pakistan announced a 200 basis point interest rate cut to 13%.
On December 17th, the Moroccan central bank announced that it would lower its benchmark interest rate from 2.75% to 2.5%.
On December 18th, Chilean Central Bank Governor Costa stated that further interest rate cuts will be made at an appropriate time.
In addition, the Bank of England will announce its interest rate decision this Thursday, and the market generally expects the Bank of England to maintain the policy rate of 4.75% unchanged and adhere to a gradual policy of interest rate cuts.
The market's expectation for the Bank of Japan to raise interest rates is constantly heating up. Nomura economists predict that the Bank of Japan will raise interest rates by 25 basis points to 0.5% this week, but it may also be postponed until January next year or later.
Dong Zhongyun, Chief Economist of AVIC Securities, analyzed to 21st Century Business Herald reporters that from the policy statements of various central banks' interest rate cuts, there are some common backgrounds for collective interest rate cuts, namely, inflation levels are falling towards the target, while economic growth is relatively weak. Moreover, after Trump takes office next year, the risk of trade frictions with the United States may add new uncertainty to the country's economic prospects. Therefore, the focus of the central bank's monetary policy is tilted towards dovish stabilization of the economy.
On the contrary, Dong Zhongyun stated that the US economy continues to demonstrate strong resilience, and there has been a certain rebound in inflation recently. The market is concerned that Trump's presidency may drive further inflation risks, which has led to a difficult path for the Federal Reserve to cut interest rates. The policy inclination is swinging between eagles and doves with indicators such as employment and inflation, and the uncertainty is higher.