On December 19, 2024, the Federal Reserve (Fed) hinted on Wednesday (December 18) that the number of rate cuts in 2025 may be fewer than previously expected. This news disappointed investors, leading to a sharp decline in the US stock market, marking one of the worst days of the year.
The Fed, as expected, announced a 25-basis-point (0.25%) rate cut on Wednesday, lowering the target range for the federal funds rate to 4.25% to 4.5%. However, according to the latest forecasts released after the meeting, Fed officials anticipate a reduction in the number of rate cuts in 2025.
Most officials anticipate two rate cuts in 2025 if the economy continues to grow steadily and inflation continues to decline. In the September outlook, officials projected around four rate cuts next year.
According to the latest dot plot released by the Fed, by the end of 2025, the median federal funds benchmark rate is expected to drop to 3.9%.
The Fed expects to cut rates twice more in 2026 and once in 2027.
Following the announcement, all four major US indexes fell. The Dow Jones Industrial Average dropped 1123.03 points or 2.58% to close at 42326.87. The S&P 500 index fell 178.45 points or 2.95% to end at 5872.16. The Nasdaq Composite index slid 716.36 points or 3.56% to close at 19392.70. The Philadelphia Semiconductor Index tumbled 198.81 points or 3.85% to 4970.98.
US bond yields also surged, with the 10-year and 30-year Treasury bond yields reaching nearly seven-month highs. The 2-year Treasury bond yield, sensitive to Fed rate policy, rose by 11.1 basis points to 4.350%, hitting a new high since November 22. The 10-year Treasury bond yield surged by 10.9 basis points to 4.493%, reaching a high not seen since May 31, and the 30-year Treasury bond yield increased by 7.8 basis points to 4.656%, hitting a high since May 30.
The Fed’s latest actions also resulted in a sharp rise in the US dollar. The US Dollar Index, which measures the dollar against a basket of weighted currencies, surged over 1% to surpass 108.00.
In the long term, the Federal Open Market Committee (FOMC) expects the neutral rate to be 3%. This is almost unchanged from the officials’ forecast in September.
Fed Chair Jerome Powell said in the post-meeting press conference: “With today’s action, we have reduced the policy rate by a full percentage point from peak. Our policy stance is greatly less restrictive now.”
“Therefore, we can be more cautious when considering further adjustments to the policy rate,” he said.
The main reason for the Fed’s more cautious attitude towards rate cuts is believed to be the return of inflation risks.
Charlie Ripley, Senior Investment Strategist at Allianz Investment Management, told the English Epoch Times, “The Fed is clearly worried.”
“We see that the threshold for rate cuts has been raised from now on, given that the Fed operates based on data levels, any meaningful increase in inflation may increase the risk of additional rate cuts, although this risk is minimal.” Ripley said.
Investors now believe that the Fed is unlikely to cut rates until inflation is firmly on track towards the 2% target.
Stoyan Panayotov, founder of Babylon Wealth Management, told the English Epoch Times, “Earlier this year, the market expected three to four rate cuts in 2025. Now, it has to adjust to two rate cuts, and the timing is very uncertain.”
“Most importantly, the stock market does not like uncertainty, and today’s announcement by the Fed has added more uncertainty to the table,” he said.
The Fed will hold its next two-day policy meeting in January. According to the Chicago Mercantile Exchange’s FedWatch tool, the vast majority of investors believe officials will pause rate cuts.
The focus in the market will now shift to the Fed’s preferred inflation gauge: the Personal Consumption Expenditures (PCE) price index. It is expected that the PCE for November will rise for the second consecutive month, reaching 2.5%.
(This article drew insights from related reports in English Epoch Times)