Federal Reserve officials cut their benchmark interest rate for a third straight time but curbed the number of cuts they expect through 2025, suggesting they are more cautious about how quickly they continue to cut rates.
The Federal Open Market Committee (FOMC) voted 11-1 to lower the federal funds rate to a range of 4.25%-4.5%. Cleveland Fed President Beth Hammack dissented in favor of keeping rates steady.
The new quarterly projections show that several officials have reduced their expectations for rate cuts next year compared with estimates a few months ago and see much less progress in inflation in 2025. They now see the benchmark rate reaching a range of 3.75% to 4% by the end of 2025, which means two more 25 basis point cuts in the benchmark rate, according to the median forecast, with only five officials saying they want more cuts next year. That compares with four cuts in September, and the median forecast for next year by most economists in a Bloomberg survey points to three cuts.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our stance of policy is now significantly less restrictive,” Fed Chairman Jerome Powell told reporters at a news conference. “We can therefore be more cautious in considering further adjustments to our policy rate.”
Still, Powell added that interest rates are still "meaningfully" holding back economic activity and that the Fed is "on track to continue to cut rates." But he said officials must see more progress on inflation before cutting rates further. "The addition of language about the magnitude and timing suggests that we are at or close to a point where we can slow down our rate cuts," he said.
Powell: Fed has no intention of holding Bitcoin
There is ongoing debate over whether the incoming Trump administration will build up a Bitcoin reserve. Powell said the Fed has no intention of holding Bitcoin. "We are not allowed to hold Bitcoin," Powell said at a press conference after the FOMC meeting. As for the legal issues of holding Bitcoin, Powell said, "This is something for Congress to consider, but we have no intention of seeking to change the law."
Powell: Further rate cuts possible even if inflation is above target
Powell explained why inflation above the Fed's target is compatible with further rate cuts. He said that even if inflation only falls to 2.5% next year, the Fed may still cut interest rates next year as the dot plot shows, because inflation will be moving in the right direction. Powell further explained that if the core PCE inflation rate falls to 2.5% year-on-year next year, what we see is meaningful progress in the decline of inflation. According to the latest FOMC quarterly economic forecast summary, the Fed expects PCE and core PCE inflation to fall to only 2.5% in 2025, which is still above the Fed's 2% target, and the Fed expects to cut interest rates twice in 2025.
Powell: Rate hike unlikely next year
Powell said at a press conference that a rate hike next year seems unlikely as the Fed is working to keep inflation down to 2% while maintaining a strong labor market. Asked if he could rule out a rate hike if the Fed slows the pace of future rate cuts, Powell said: "You can't totally rule the course of events in this world. That doesn't seem like a likely outcome. I think 4.3% is a meaningfully constrained level, a well-calibrated range that allows us to continue to make progress on inflation while maintaining a strong labor market."
Powell also answered questions about how the Fed would respond to possible tariffs from the Trump administration. He said some policymakers have begun to consider the potential impact of higher tariffs that Trump could impose, but the impact of these policy proposals is still far from certain. Powell said the Fed is simulating and evaluating Trump's proposals but has not yet incorporated them into its decision-making because it is unclear what specific form these policies will take.
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/ounce for the first time since November 18, and fell sharply by nearly $60 unilaterally during the session, and the daily decline widened to more than 2%. The yield on the 10-year US Treasury bond reached its highest level since the end of May, rising 11.3 basis points to 4.5% on the day. Bitcoin fell by more than 4% on the day.
The three major U.S. stock indices continued to fall, with the Nasdaq falling more than 3% in late trading, the S&P 500 falling more than 2% (this was the biggest drop in the S&P 500 on the day of the Federal Reserve's interest rate decision since 2001), and the Dow Jones Industrial Average falling more than 1,000 points, closing down 2.59%, marking the 10th consecutive trading day of decline. This is the Dow Jones' longest single-day losing streak since it fell for 11 consecutive trading days in October 1974.
Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, said: "The Fed has sent a signal that they will not be as dovish as they have been in the past, and they prefer fewer rate cuts next year. I think this is a signal that the market will continue to price in less than two rate cuts, and if the data is strong enough, it may move towards zero rate cuts. If the Fed does not see inflation falling enough, they are reluctant to continue to cut interest rates."
Analyst Chris said that the disagreement on long-term interest rate forecasts does highlight that there is no consensus among the committee members on the true definition of the neutral interest rate. But one thing that almost everyone agrees on is that it is higher than before the COVID-19 pandemic. Economists attribute this to a variety of reasons, including the increase in the federal debt burden. The gap between the lowest and highest long-term interest rate forecasts is as high as 1.5 percentage points, from 2.4% all the way up to 3.9%.
Seema Shah, chief global strategist at Principal Asset Management, said: "Today's decision to cut rates is not surprising in itself. However, given the significant revisions to economic forecasts, it does indicate a reluctant rate cut - designed to give the market some comfort as the Fed lays the foundation for a tougher policy approach in 2025. Of course, the economic and inflationary backdrop shows no signs of requiring a lot of policy stimulus, and the incoming new administration may give them a serious inflation problem next year. The tendency to further ease monetary policy should still exist, but caution and patience are clearly needed at this stage."
Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, called Powell "an eagle in dove clothing."
Whitney Watson of Goldman Sachs Asset Management expects the Fed to skip a rate cut in January and then restart its easing policy in March.
"New Bond King" Gundlach said that if energy prices rise sharply, we may not see the Federal Reserve cut interest rates until 2025. He expects both gold and Bitcoin to fluctuate sideways in the short term.
Article forwarded from: Jinshi Data
