Economic data exceeds expectations, Fed’s attitude attracts attention
The Federal Reserve (Fed) is about to announce its latest interest rate decision in the early morning of December 19, Taipei time. The market is generally expected to cut interest rates again by 0.25 percentage points, lowering the effective interest rate from 4.7% to 4.4%. However, what is really eye-catching is not the extent of this interest rate cut, but the Fed's forward-looking stance on the path of interest rates in 2025. Although lawmakers in September vaguely committed to a 100 basis point cut next year, Wall Street expectations have become more conservative, with some traders even predicting only a 50 basis point cut next year.
However, some economists take a more optimistic or middle-ground view. According to analysis by Torsten Slok, chief economist at Apollo Global Management, recent U.S. economic data have been strong, with GDP in the third and fourth quarters revised upward to 2.8% and 3.3% respectively, much higher than the original CBO estimate of 2% "sustainable growth." level. At the same time, inflation is falling but remains stubbornly sticky, with CPI still hovering between 3% and 4%, above the official target of 2%. This situation of "a strong economy and less-than-expected inflation cooling" has led some experts to believe that the Fed may not dare to let go too quickly next year.
The pace of interest rate cuts is tight, and volatility may intensify
From a market perspective, Wall Street's conservative adjustments coexist with the Fed's increasingly difficult decision-making. Interest rates are still high and inflation is not moderate enough, which means that if the Federal Reserve cuts interest rates rashly and significantly next year, it may encourage excessive easing of funds and once again push up inflationary pressures. Slok predicts that the Fed may slightly raise its interest rate path target for 2025 (such as to 3.7% from the previously expected 3.4%), which is between the 3.9% currently expected by Wall Street and the mid-point of the Fed's previous commitment.
What does this move mean for the market? If interest rates are higher than expected but will still gradually decline, the overall cost of funds will still tend to decline, which will be conducive to lending and leverage operations, causing more funds to flow into risky assets (including stocks and cryptocurrencies), pushing up their prices. However, since the interest rate cut is not as deep as optimists think, it may also trigger market adjustments or shocks in the short term. The market still has to evaluate: If the Fed's more prudent interest rate cut expectations are not enough to strongly boost risk appetite, will investors rethink their asset allocation strategies?
The new regulatory environment and policy changes will dominate future market trends
Another key factor influencing the path for rate cuts in 2025 is the U.S. policy environment. If the government that takes office after the 2024 election (such as Trump returning to power) tends to loosen financial regulations and encourage capital investment, the crypto market may usher in a more favorable regulatory ecosystem. New policies such as tax cuts, tariffs and immigration controls are likely to push up inflation, making the Fed's expected interest rate cuts less aggressive. However, once the policy maintains a stable economy rather than "emergency interest rate cuts", this will be a healthy sign for long-term investors: it shows that the economy is resilient and the financial market is more stable.
On the other hand, crypto analysts observed that Bitcoin recently hit a new high of $108,367, with the market anticipating that loose monetary conditions will continue to drive the strength of risk assets. If investors expect a sharp interest rate cut to boost sentiment, they may need to make a rational assessment: the Fed may only give a slightly lower-than-expected easing signal. Once trading psychology falls short, prices may experience a temporary correction.
Source: TradingView Bitcoin continues to hit new highs, with the price recently reaching a high of 108,367
Key: Steady weight reduction replaces drastic interest rate cuts
In summary, after the Federal Reserve's December interest rate decision, the outside world's view of the extent of interest rate cuts in 2025 is likely to be more "neutral": not no reduction, but a slow reduction. Although inflation is moving downward toward the target, it is still "tenacious"; although the economy is still strong, the Fed is unwilling to risk overstimulation. The Fed will adjust its pace based on actual data and policy variables, rather than seeking short-term pleasure with a "one-time big cut".
For the market, this is a signal of calmness and pragmatism. Overly optimistic interest rate cut expectations need to be revised, but at least there is still a mild monetary environment to look forward to, which will still provide long-term mild support for stocks, bonds and even the crypto market. The conclusion is that with the economy performing better than expected, inflation falling but not enough, and the regulatory environment waiting to be clarified, the pace and magnitude of interest rate cuts in 2025 will still be the key to influencing market trends. Investors must do a good job in risk management and fine-tune their investment strategies in a timely manner to cope with the subtle changes that may be brought about by the Fed's "flexible interest rate cuts".
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
"The economy is strong but inflation is stubborn!" The Federal Reserve is afraid of a soft interest rate cut. How will the market behave next year? 』This article was first published in "CryptoCity"
