Beijing time, December 19th 03:00 The Federal Reserve announced its interest rate decision and a summary of economic expectations.

03:30 Federal Reserve Chairman Powell holds a monetary policy press conference to provide forward-looking guidance to the market.

Currently, CME FedWatch:

The probability of the Federal Reserve cutting interest rates by 25BP in December 2024 is 95.4%.

The probability that the Federal Reserve will keep interest rates unchanged in January 2025 is 79.9%.

There is almost no suspense about the 25BP rate in December, and no rate cut in January has already been priced in.

The focus of market attention is on the tone of Powell’s forward guidance: hawkish or dovish?

[S&P expects the Fed to cut interest rates less frequently next year] S&P said it expects the FOMC to cut interest rates by 25 basis points at this week's meeting and to be cautious about future easing policies. The Fed's revised economic forecast is expected to see the federal funds rate reach 3.5%-3.75% by the end of next year, higher than the previous forecast of 3%-3.25%. This adjustment reflects that economic growth is more resilient than previously understood, inflationary impulses continue to be excessive, and the upside risks to inflation expectations posed by the new administration's policy preferences.

With the support of Morgan Stanley, the size of bets on the Federal Reserve's interest rate cuts in December and January has risen sharply in the federal funds futures market. The number of January and February contracts held by traders surged on Friday. Morgan Stanley strategists said in a report that they recommend buying the February contract. "We believe investors should prepare for the market-implied probability of a 25 basis point rate cut at the January 29 FOMC meeting to rise," strategists led by Matthew Hornbach said in a report. The recommended way to position for this, they wrote, includes buying the February federal funds contract and receiving the overnight index swap rate corresponding to the January meeting.

Morgan Stanley economists expect the Fed to cut interest rates by 25 basis points in December and January, but investors remain skeptical. The OIS market is pricing in a rate cut of about 20 basis points on December 18, or an 80% chance of a rate cut. That was about 64% before the release of the November non-farm payrolls data on Friday. After the employment data was released, traders increased their bets on a rate cut by the Fed this month.

Institutional views are also divided.

Shang Ge subjectively believes that:

The focus of this interest rate decision is on the interest rate decision and the market's expected changes in the extent of the interest rate cut in 2025 after Powell's speech:

If 100BP is expected, it is in line with expectations and the impact is neutral;

If it is greater than 100BP, it is beyond expectation and is a positive sign;

Below 100BP is bearish.

Personally, I prefer neutral, which is in line with expectations. That is, after this interest rate decision, the market expects that the federal funds rate will reach 3.5%-3.75% by the end of next year.

Support is as follows:

1. The Federal Reserve has the ability to manage expectations by cutting interest rates in a way that is in line with market expectations but actually guides the U.S. dollar index higher.

The 2024 rate cut is in line with the expected strength of the September interest rate decision dot plot, but the US dollar index is higher.

2. Based on the logic of confrontation, no one will fully anticipate the trend of interest rates for the next year in advance. Only by playing Tai Chi and making people unpredictable can there be room for confrontation on the left or right.

This is similar to the logic when Trump threatened to impose a 60% tariff on Tokyo University during his election campaign, but actually only called for a 10% increase for the first time.

3.3 years of masks. In the first and second quarters of 25, a large number of five-year credit lines for enterprises and individuals will expire. If the Federal Reserve is too hawkish, it will significantly raise the actual interest rate and increase the risk of the real economy.

Da Piaoliang will never do anything that would harm herself and benefit others, so based on this, there is a possibility that she might be more dovish.

 

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