On December 19th Beijing time, the Federal Reserve announced a reduction in the federal funds rate target range by 25 basis points to 4.25%-4.5%. This marks the third rate cut of the year, aligning with market expectations. As a result, the central parity rate of the RMB against the USD was adjusted to 7.1911, a decrease of 31 points.
Fed Policy Review and Future Guidance
In 2024, throughout eight policy meetings, the Federal Reserve implemented a 50-basis-point rate cut once, two rate cuts of 25 basis points, and maintained rates unchanged five times. Following this rate cut, Federal Reserve Chair Powell stated at a press conference that the current restrictive policy has slightly eased and future rate adjustments will be more cautious. He emphasized that no fixed path has been set for rate policy and adjustments will be made dynamically based on economic data.
The Rate Cut Pace May Slow Down Next Year
According to the latest economic outlook released by the Federal Reserve, the U.S. economy is projected to grow by 2.5% in 2024. Most officials predict that by the end of 2025, the federal funds rate target range may decrease to 3.75%-4.0%. Compared to 2023's pace of rate cuts, the pace of cuts in 2024 is expected to slow significantly, with only a 50 basis point cut anticipated.
Dot Plot Indicates Higher Long-term Rate Expectations
The latest dot plot shows the median expectation for the federal funds rate at the end of 2025 is 3.9%, higher than the 3.4% expected in September. The median expectation for the end of 2026 is 3.4%, also higher than the previous expectation of 2.9%. In the long run, the median expectation for the federal funds rate remains at 3.0%, slightly up from September.
RMB Market Reaction
Following the Federal Reserve's rate cut announcement, the central parity rate of RMB against the USD was adjusted down by 31 points to 7.1911. This adjustment reflects changes in market expectations regarding Federal Reserve policies, and indicates that fluctuations in interest rate differentials among major global currencies will continue to impact the foreign exchange market.
Summary and Outlook
This rate cut demonstrates a cautiously optimistic stance by the Federal Reserve on economic growth and inflation prospects, yet the future policy path remains quite uncertain. Investors need to closely monitor U.S. economic data and global market dynamics to prepare for potential volatility. Meanwhile, the RMB market will also be influenced by USD trends and both domestic and international policy changes.
