Interest Rate Cut of 25bp, 💰 Is the Stock Market Going to Crash?⁉️

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, as Cleveland Fed President Beth Hammack cast a dissenting vote, advocating for maintaining the current rate.

Alongside this rate cut, Fed officials raised their expectations for future inflation and suggested that the pace of rate cuts in 2025 would slow down. According to the latest forecast, only a further 50 basis points of cuts are planned for 2025, down from the previously expected 100 basis points. This adjustment reflects concerns among decision-makers that reducing borrowing costs too quickly could undermine efforts to contain inflation.

Fed Chair Jerome Powell stated at the press conference that the current policy stance has "significantly reduced restrictions" and that future easing measures will be considered with a more cautious approach. He also mentioned that this decision was more challenging than in the past, indicating a divergence of views internally regarding the economic outlook.

The market reacted noticeably to this. The dollar index rose by 1%, U.S. stocks fell, with the S&P 500 down 2.37%, Nasdaq down 2.95%, and gold dropping below 2600. U.S. Treasury prices fell, with the 2-year Treasury yield rising by 8 basis points to 4.33%. These market fluctuations reflect investor uncertainty regarding the Fed's policy path and a reevaluation of the economic growth and inflation outlook.

Looking ahead, Fed officials expect the policy rate to drop to a range of 3.25%-3.5% by the end of 2026, which is higher than the forecasts made three months ago. They also raised their core inflation expectations, predicting 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 predictions indicate that despite the rate cuts, the Fed's concerns about inflation persist, and future policy will continue to focus on changes in economic data.

Overall, while the Fed continues to adopt an accommodative policy, it emphasizes vigilance regarding inflation based on the impacts of Trump's tariff policy, suggesting that future monetary policy will be more reliant on economic data and fiscal policy.

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