The Federal Reserve Slows Pace of Rate Cuts, Signaling Shift in Future Policy

The Federal Reserve Slows Pace of Rate Cuts, Signaling Shift in Future PolicyIn the early hours of Thursday, December 19th (Beijing time), the Federal Reserve announced a 25-basis-point reduction in its target range for the federal funds rate, bringing it down from 4.5% to 4

The Federal Reserve Slows Pace of Rate Cuts, Signaling Shift in Future Policy

In the early hours of Thursday, December 19th (Beijing time), the Federal Reserve announced a 25-basis-point reduction in its target range for the federal funds rate, bringing it down from 4.5% to 4.75% to 4.25% to 4.5%. This marks the third consecutive rate cut following similar moves in September and November, totaling a 100-basis-point reduction for the year. Simultaneously, the Fed also lowered the primary credit rate to 4.50%, the overnight reverse repurchase rate to 4.25%, and the discount rate to 4.50%.

Fed Chairman Jerome Powell stated in a press release that the inclusion of the phrase "the pace and timing" in the FOMC statement indicates the Fed is at or nearing a point where it will slow the pace of rate cuts. He explained that stronger-than-expected economic data this year prompted the deceleration; rising inflation expectations are driving the slower pace for next year, with future decisions depending on incoming data. Notably, Cleveland Fed President Loretta Mester dissented from the decision, arguing against the rate cut.

The Fed's post-meeting announcement noted that recent economic indicators show that economic activity is expanding at a moderate pace. Labor market conditions have eased somewhat, with unemployment rising but remaining low. Inflation is moving toward the 2% target but remains elevated. The Fed aims to achieve maximum employment and 2% inflation over the long run. The committee judged that the risks to achieving those goals were roughly balanced, and it is closely monitoring the balance of those risks, given the uncertainties surrounding the economic outlook.

Data-wise, the November Consumer Price Index (CPI) rose 2.7% year-over-year, matching market expectations but still exceeding the Fed's 2% target, continuing the rebound from the previous month. Core CPI increased by 3.3% year-over-year, also aligning with forecasts. The Fed's preferred measure, the Personal Consumption Expenditures (PCE) price index, is due to be released on Friday, with economists predicting a 0.2% month-over-month increase in core PCE for November, the smallest gain in three months.

Following the rate cut, the US dollar index rose, while the offshore yuan fell to a new 2023 low of 7.3230 per dollar. All three major US stock indices declined, with the Dow Jones Industrial Average experiencing its longest ten-day losing streak since October 1974. Large tech stocks were broadly lower, with Tesla falling over 8%, Amazon over 4%, Google, Meta, Microsoft, Netflix all down over 3%, Apple down over 2%, and Nvidia down over 1%. Most popular Chinese stocks listed in the US also closed lower, with the Nasdaq Golden Dragon China Index falling 2.41%. NIO, Weibo, and Trip.com fell over 4%, Bilibili and iQiyi over 3%, and Alibaba, XPeng, NetEase, JD.com, and Baidu all lost over 2%; Li Auto bucked the trend, rising over 1%. Cryptocurrency-related stocks also experienced significant declines, exacerbated by Powell's explicit statement that the central bank will not hold Bitcoin nor seek legal changes to do so. The cryptocurrency market suffered even steeper losses, with Bitcoin plunging over 5%, nearing the $10,000 mark; Ethereum fell over 6%, and Dogecoin over 9%, resulting in over 250,000 liquidations. Spot gold and silver prices continued to fall, while US 2-year and 10-year Treasury yields rose.

While the rate cut was anticipated, the magnitude and number of future cuts in 2024 are now the market's focus. The dot plot anticipates two rate cuts in 2025, down from a projection of four in September interpreted as a so-called "hawkish cut." The Fed stated it will carefully assess incoming data, the evolving outlook, and the balance of risks when considering the size and timing of future adjustments to the target range for the federal funds rate.

"Fed whisperer" Nick Timiraos noted that the addition of "pace and timing" in the policy statement signals a slowdown in rate cuts. The CME FedWatch Tool shows only a 16.3% probability of a further cut to 4.00%4.25% in January, with the market widely expecting a pause in rate cuts next month. Several Fed officials have also suggested they need to see more concrete evidence of improving inflation or deteriorating labor market conditions before further reducing borrowing costs. Cleveland Fed President Mester earlier stated the Fed had reached or was nearing the point where it should slow the pace of rate cuts, referencing the Fed's experience in the 1990s when a rapid 75-basis-point cut was followed by a pause.

Goldman Sachs chief economist Jan Hatzius, in his latest report, also indicated that the Fed is likely to slow the pace of rate cuts going forward. He removed his expectation of a January rate cut and anticipates a total of three rate cuts in March, June, and September of next year.

Shortly after the Fed's announcement, the Qatar Central Bank cut its deposit rate by 30 basis points. Since December, several major economies have announced rate cuts. The Bank of Canada cut rates by 50 basis points on December 11th; the European Central Bank cut by 25 basis points on December 12th, its fourth cut of the year; the Swiss National Bank unexpectedly cut by 50 basis points on December 12th, its largest cut since January 2015; the State Bank of Pakistan cut by 200 basis points to 13% on December 16th; the Bank Al-Maghrib cut to 2.5% on December 17th; and the Governor of the Central Bank of Chile indicated further cuts were likely at the appropriate time. The Bank of England is expected to keep its policy rate at 4.75%, maintaining a gradual approach; meanwhile, market expectations are rising for a Bank of Japan rate hike, with Nomura Securities predicting a 25-basis-point increase to 0.5% this week.

Zhongxing Securities chief economist Dong Zhongyun analyzed that the commonality across central banks' rate cuts is declining inflation toward targets, weak economic growth, and uncertainty surrounding potential increased trade friction following a potential Trump administration, shifting the focus of monetary policy towards stabilizing the economy. However, the continued strength of the US economy and recent inflation rebound, coupled with market concerns that a Trump return could exacerbate inflationary risks, are creating headwinds for the Feds rate-cutting path, leading to a policy stance oscillating between hawkish and dovish stances, resulting in heightened uncertainty.

In conclusion, the Fed's 25-basis-point rate cut and its signaling of a slower pace reflect a complex interplay between economic data and inflation expectations. The future direction of the Fed's monetary policy will depend on evolving economic data and the assessment of potential risks. The diverse monetary policy responses of other global central banks further add to uncertainty in the global economy.