In the early morning of December 19th, Beijing time, the Federal Reserve announced a 25 basis points cut in interest rates, lowering the federal funds rate range from 4.5%~4.75% to 4.25%~4.50%. This is the third rate cut since the Federal Reserve began its rate-cutting cycle in September 2024, and the last meeting on rates before the new Trump administration takes office. Although the rate cut was in line with market expectations, the hawkish signal from the decision strengthened the possibility of a slower pace of future rate cuts.
Hawkish Rate Cut Signal Enhances, Internal Division in the Fed Emerges
In this meeting, 11 out of 12 voting officials supported a 25 basis points rate cut, while Cleveland Fed President Beth Hammack opposed it, advocating for a pause in rate cuts. This division highlights the controversy within the Fed regarding the pace of rate cuts. The dot plot shows the Fed expects to cut rates twice in 2025, significantly reduced from the previous forecast of four times, with the timeline for reaching inflation targets pushed back to 2027.
Recent data indicates improvements in the U.S. labor market, with inflation rebounding above expectations. The core personal consumption expenditures (PCE) price index has exceeded expectations for two consecutive months, up 2.8% year-over-year in November. Meanwhile, the U.S. GDP growth remains robust, with the Atlanta Fed forecasting a 3.2% growth in the fourth quarter of 2024. The economy's resilience and inflation pressures are causing the Fed to pause further rate cuts.
Trump's Policies Could Become a Key Variable
As Trump is set to return to the White House, his policies could significantly impact future economic and monetary policies. The Trump administration might implement multiple measures, including tariff adjustments and fiscal stimulus, expected to drive up inflation and complicate the Fed's interest rate adjustments.
Under the baseline forecast scenario, the Fed may cut rates twice in the first half of 2025, then pause rate cuts, focusing on the potential impacts of Trump's policies. If tariff policies accelerate inflation, the scope for rate cuts may narrow further, potentially ending the rate-cut cycle prematurely. Markets need to closely monitor the execution of Trump administration policies, as these will be crucial variables influencing future Fed decisions.
Capital Markets Face Short-term Adjustment Risks
Hawkish rate cuts and the uncertainty of Trump's policies have triggered a chain reaction in global capital markets. Following the December Fed meeting, the dollar index rebounded above 108, and the 10-year U.S. Treasury yield surpassed 4.5%, indicating strengthened market expectations for the Fed to slow down the pace of rate cuts.
Simultaneously, non-U.S. currencies and the commodities market are under pressure. Gold prices retreated due to the stronger dollar, and the Dow Jones index fell for 10 consecutive days, dropping over 1,100 points at one point. Short-term market trading logic may focus more on macroeconomic fundamentals, particularly the possibility of the U.S. economy transitioning from a "soft landing" to a recovery.
Future Outlook: A Battle Between Economic Recovery and Inflation Rebound
In the long run, U.S. economic recovery will provide some support for commodity demand, but the room for interest rate cuts is limited, and the strong dollar trend will continue to suppress commodity prices. At the same time, possible fiscal easing and tariff policies by Trump are expected to exacerbate inflation expectations, with anti-inflation and hedging demand likely to support precious metal prices.
For the gold market, short-term pressure from slowed rate cuts is present, but in the medium to long term, as inflation rises and real interest rates decrease, its anti-inflation properties will continue to provide support. The market needs to closely monitor economic data, the implementation of Trump's policies, and geopolitical risks.
Overall, the hawkish rate cut marks a more cautious phase in the Fed's monetary policy, with future market trading logic centered around U.S. economic performance and Trump's policies. Major asset classes may face short-term adjustment pressure, but long-term trends will still depend on specific changes in the global economy and policies.
