In 2024, the Federal Reserve initiated a new cycle of interest rate cuts, reducing by a total of 100 basis points throughout the year, ending the protracted rate-hiking policy aimed at combating high inflation. However, as the newly elected President Trump is set to take office on January 20, 2025, the global economic and financial environment faces a new wave of complex changes. The potential impacts of Trump's new policies, along with renewed inflation concerns, create uncertainty in the Fed's policy outlook.
Cautiously Initiating Rate Cuts in 2024
After two years of significant interest rate hikes, the Federal Reserve maintained rates at historically high levels in early 2024 to address inflationary pressures and market volatility. The U.S. economy performed steadily in the first half of the year, with a healthy job market and a stable addition of new jobs. The unemployment rate rose above 4% only in May. Given the labor market's resilience and the fact that inflation hadn't significantly abated, the Fed kept the federal funds rate target range between 5.25% and 5.50% in the first half of the year.
By July, the Fed began signaling rate cuts. In September, it announced a 50 basis point rate reduction, officially starting the cycle of cuts, marking the first rate drop in four years. Subsequently, the Fed further reduced rates by 25 basis points during meetings in November and December, lowering the target range to 4.25% - 4.50%. However, by the end of the year, the Fed stated clearly that future rate cuts would be more cautious.
Uncertain Path of Rate Cuts in 2025
Looking ahead to 2025, the Fed's policy faces numerous challenges. On one hand, progress in fighting inflation has stalled, and the potential policy mix of the Trump administration (such as tariff policies, fiscal expenditure adjustments, and immigration policy reforms) could exert additional inflationary pressures. On the other hand, U.S. economic growth is expected to slow down. According to the Organization for Economic Cooperation and Development (OECD), the U.S. GDP growth rate is projected to decrease to 2.4% in 2025 and 2.1% in 2026.
Disagreements within the Federal Reserve regarding the pace of rate cuts have intensified. Once new rotating members of the Federal Open Market Committee (FOMC) vote, differences in opinions might become more pronounced. Some officials are concerned Trump's policies could exacerbate inflation and are calling for maintaining high interest rates to balance economic and price stability. The market generally expects the Fed to cut rates only twice in 2025, with a trend towards a more cautious overall policy stance.
Strength of the Dollar and Global Market Volatility
In 2024, the dollar index showed strong performance, rising by over 7% throughout the year, making it potentially the strongest year since 2015. Trump's previous promises to impose high tariffs on multiple trade partners boosted the dollar's rally. Amid a backdrop of rate cuts by major central banks globally, the U.S.'s relatively high interest rates and economic performance further strengthened the dollar's dominant position.
Institutions forecast that the dollar might continue to rise in the first half of 2025 but could pull back in the second half due to trade tensions and global economic adjustments. Investment banks like JPMorgan and Goldman Sachs predict that Trump's new policies might increase U.S. domestic inflation pressure and weaken other economies, heightening global market volatility.
Market Outlook and Risk Warning
Overall, uncertainties will continue to persist in the global economic and financial markets in 2025. The Fed will need to strike a delicate balance in policy adjustments between inflation targets and economic growth. Meanwhile, the intensity of Trump's policy implementations and their ripple effects on the global economy will be key focuses for investors. The strength of the dollar and uncertainty in trade policies could heighten volatility in emerging market currencies, posing more challenges to global capital flows.
In such a complex policy and economic environment, the market must closely monitor the Fed's policy trajectory and the potential impacts of the Trump administration's new policies to adequately prepare for future investment decisions.
