Interest Rate Cut of 25 Basis Points, Is the Cryptocurrency Market Going to Collapse?

On December 18, the Federal Reserve announced a reduction of the federal funds rate by 25 basis points to a range of 4.25%-4.5%, marking the third consecutive rate cut. However, the decision was not unanimous; Cleveland Fed President Beth Hammack cast a dissenting vote, advocating to keep the rate unchanged.

Along with this rate cut, Fed officials raised their inflation expectations for the future and hinted that the pace of rate cuts in 2025 would slow down. According to the latest forecasts, only a further 50 basis points reduction is planned for 2025, down from the previous expectation of 100 basis points. This adjustment reflects the policymakers' concerns that a rapid reduction in borrowing costs might undermine efforts to contain inflation.

Federal Reserve Chairman Jerome Powell stated at the press conference that the current policy setting has "significantly reduced restrictions" and that future considerations for further easing measures will be approached with more caution. He also mentioned that this decision was more challenging than in the past, indicating internal disagreements on the economic outlook.

The market reacted significantly. The U.S. dollar index rose by 1%, U.S. stock markets fell, with the S&P 500 down by 2.37% and Nasdaq down by 2.95%, while gold dropped below 2600. U.S. Treasury prices fell, and the 2-year Treasury yield rose by 8 basis points to 4.33%. These market fluctuations reflect investors' uncertainty regarding the Fed's policy path and a reassessment of the economic growth and inflation outlook.

Looking ahead, Fed officials expect that by the end of 2026, the policy rate will drop to a range of 3.25%-3.5%, higher than the forecast made three months ago. They also raised their core inflation expectations to 2.5% and 2.2% for 2025 and 2026, respectively. The unemployment rate is expected to remain at 4.3% over the next three years. These forecasts indicate that despite the rate cuts, the Fed's concerns about inflation persist, and future policies will continue to focus on changes in economic data.

Overall, while the Fed continues to adopt easing policies, emphasizing vigilance regarding inflation based on the impact of Trump's tariff policies, it indicates that future monetary policy will increasingly rely on economic data and fiscal policy.