On Wednesday, the Federal Reserve announced a 25 basis point cut to its key interest rate, bringing it down to the 4.25%-4.50% range. This is the third consecutive rate cut this year. Although the cut met market expectations, the Fed's hawkish signals prompted a strong market reaction, with investors heavily selling off risk assets, causing panic on Wall Street.
Federal Reserve Chairman Jerome Powell stated at the post-meeting press conference that as long as the inflation rate remains above the 2% target level, the Fed may pause further rate cuts. He emphasized that future monetary policy will be more cautious, causing market expectations for rate cuts next year to drop significantly. Earlier, it was widely anticipated that the Fed would cut rates two to three times next year, but current signals suggest that there might be fewer than two cuts, or potentially only one.
Market Turmoil: Stocks and Bonds Under Pressure
Driven by the Fed's hawkish stance, the U.S. stock market suffered a heavy setback. The S&P 500 Index rose slightly before the rate cut announcement but then plunged 3%, marking the largest "Fed Day" drop since emergency rate cuts in March 2020 in response to the COVID-19 pandemic. The Russell 2000 Index fared even worse, dropping 4.4%, its largest single-day drop since June 2022. Less than 20 S&P 500 constituent stocks gained, indicating widespread selling pressure.
Meanwhile, U.S. Treasury yields surged sharply, serving as a key indicator of market panic. This decision is viewed as the Fed’s most hawkish move since the 2013 "taper tantrum." The Chicago Board Options Exchange's Volatility Index (VIX) soared to 28, its highest level since August, further reflecting market unease.
Market Reaction: Concerns Over Policy Shift
Although the rate cut was already priced into the market, the interpretation of the Fed's statement wording has sparked widespread concern. The market originally expected two to three rate cuts next year, leaning towards three, but current signals suggest a significant reduction in the number. Analysts point out that the market reaction may be somewhat excessive, reflecting an instinctive response to a policy path that should already be known.
Investors also express concern over the incoming government's policy direction. New fiscal and trade policies could impact economic growth and the inflation path, adding further uncertainty to the market.
Looking Ahead: Caution Likely to Persist
The Fed’s hawkish stance demonstrates its cautious attitude towards future rate cuts, particularly amid high inflation. With the market re-evaluating the policy path, future volatility may continue to intensify. Investors need to pay attention to upcoming economic data and the potential impact of new government policies on the market to navigate future uncertainties and risks.
