Date: December 19, 2024
Decision Summary
As expected by the market, the Federal Reserve announced a 25 basis point reduction in the target range for the federal funds rate to 4.25%-4.5%. This rate cut aims to continue promoting stable economic growth while supporting the achievement of its dual mandate: maximum employment and a long-term inflation rate of 2%.
Key Statement Highlights:
1. Economic Activity and Labor Market
Economic activity remains robust.
The labor market has slightly slowed, and the unemployment rate has risen but remains low.
2. Inflation Situation
Inflation is close to the 2% target but still slightly above expected levels.
According to the latest economic forecasts, inflation will stabilize to the 2% target only by 2027, a year later than the previous forecast of 2026.
3. Future Policy Guidance
The Federal Reserve will reassess the magnitude and timing of further rate cuts based on the latest data and economic risks.
Dot plot forecast: 2 rate cuts expected in 2025, a reduction from the 4 cuts predicted in September.
4. Balance Sheet Plan
The Federal Reserve will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities.
Internal Divergence in Decision-Making
The Federal Reserve committee unanimously supports the rate cut, with only Cleveland Fed President Loretta Mester casting a dissenting vote, advocating to maintain the rate at 4.5%-4.75%, arguing that current rate cuts could lead to excessive easing of financial conditions.
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Background Analysis and Impact
1. Economic growth continues but uncertainty increases
The Federal Reserve states that economic activity is robust, but in the context of volatility in international financial markets and geopolitical risks, uncertainties surrounding the economic outlook have increased.
Although the labor market appears weak, it remains resilient, providing support for policy space.
2. Delayed inflation target affects policy adjustments
Inflation forecasts have been pushed back to 2027, indicating that pressures may persist, which provides greater flexibility for future policies, but also requires vigilance against the risk of rising inflation.
3. Policy Outlook: Slowdown in Rate Cuts in 2025
The Federal Reserve has adjusted its policy forecast for 2025 based on the latest data, reducing the number of expected rate cuts from four to two, indicating a more cautious attitude toward the economic outlook.
4. Market Reaction Expectations
The market may view this rate cut as a signal of policy patience rather than a continuation of the easing cycle. Investors will pay attention to next year's employment data and inflation dynamics, seeking more policy clues.
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Conclusion and Outlook
This interest rate cut marks the Federal Reserve's balance in regulating the current economic and inflation environment, indicating that it remains focused on achieving its dual mandate.
Future policy adjustments will depend on the following factors:
Is the labor market continuing to slow?
Is inflation close to the 2% target?
International economic and financial market stability.
For the market, this decision is a mild signal of easing, but future rate cuts and their magnitude need to be more cautious.
