In the early hours of Thursday, Beijing time, the Federal Reserve announced it would lower the target range for the federal funds rate by 25 basis points to 4.25%-4.50%. This marks the third rate cut by the Fed this year but, unlike previous expectations, the Fed significantly reduced its expected rate cut range for 2025. The primary reason for this change is the persistently high inflation.
According to the latest rate path "dot plot," the Fed anticipates two rate cuts in 2025, each by 25 basis points, whereas the September forecast predicted four cuts. The rate cut plan for 2026 remains unchanged, with an expectation of two cuts, each by 25 basis points. This adjustment caused significant market volatility, with the Dow Jones Industrial Average closing down more than 1,100 points on Wednesday, a drop of about 2.5%, and the Nasdaq Composite Index falling by approximately 3.5%.
At the press conference, Federal Reserve Chair Jerome Powell stated that the December rate cut decision was "a tougher choice," but "the right one." He emphasized that future rate adjustments would be data-driven rather than based on forecasts. Powell noted that inflation remains a major consideration for policy adjustments, with the Fed projecting the core inflation indicator for 2025 to reach 2.5%, 0.3 percentage points higher than previous forecasts.
Additionally, Powell mentioned that the Fed is approaching a "neutral rate" level, which means future policy adjustments will be more cautious. He described the current economic policy environment as "driving through fog," requiring a slower pace to deal with uncertainty.
Nevertheless, there are significant disagreements within the Fed regarding the future path of rate cuts. Among the 19 decision-makers, 5 predict that the rate cut range in 2025 will reach 75 basis points or more, while some officials voted against the current rate cut. Cleveland Fed President Beth Hammack leans towards maintaining the current rate range of 4.50%-4.75%.
External analysts have taken a cautious stance on the Fed's policy adjustments. Deutsche Asset Management noted in its latest report that they expect the Fed to cut rates three times by the end of 2025, two fewer than previously predicted. Analysts believe that the volatility of U.S. economic data, persistently high inflationary pressures, and uncertainties in fiscal and trade policies might affect the pace of rate cuts.
The Fed's adjustments are also influenced by political factors. Powell acknowledged that some Fed officials are assessing the potential impact of President-elect Donald Trump's policies on the economy and inflation. Trump's trade tariffs and immigration policies might further increase inflation uncertainty.
Overall, the Fed's decisions in December reflect a cautious approach amid a complex economic environment, providing the market with more ambiguous signals regarding future policy directions.
