On Thursday, December 19, Beijing time, the Federal Reserve announced a reduction of the federal funds rate target range from 4.5%-4.75% to 4.25%-4.5%, a 25 basis point cut, meeting market expectations. This marks the Fed's sixth rate adjustment this year and the second consecutive 25 basis point cut. Previously, the Fed maintained rates unchanged during five meetings from January to July, but has cut rates three times since September.
The US Dollar Index reacted strongly:
After the announcement, the US Dollar Index surged rapidly, breaking the 108 mark and recording 108.0353, indicating a strong market response. The dollar rose against major non-US currencies, putting pressure on them. The dollar reached a recent high against the Canadian dollar, hitting the 1.44 mark, while it fell below 7.3 against the offshore RMB. This fluctuation reflects market uncertainty about future Fed policies and confidence in the US economic fundamentals.
Market volatility:
The three major US stock indices experienced a "flash crash," with the Dow dropping 2.59%, the Nasdaq 3.56%, and the S&P 500 down 2.95%. The Dow set the longest consecutive decline since October 1974, marking its tenth straight day of losses. The gold market was also impacted, with spot gold falling nearly 22 dollars, to 2618.799 USD/ounce. The dollar's strength intensified the downward pressure on safe-haven assets.
Policy signals and market expectations:
Federal Reserve Chairman Powell stated at the press conference that the current restrictive policy stance has eased, and the Fed will be more cautious in considering future rate adjustments. He emphasized that the Fed has not set any preset path for rate policy and will respond flexibly based on economic data. However, market expectations have clearly shifted. According to data from the London Stock Exchange, the probability of the Fed maintaining rates unchanged at the January 2024 meeting has exceeded 90%, indicating that investors generally believe the pace of rate cuts may pause in the short term.
Political factors overlay:
This rate cut attracted significant attention because it was the last Fed meeting before President-elect Trump's formal inauguration. During his campaign, Trump repeatedly criticized the Fed publicly, accusing its policies of hindering economic growth and even suggesting "ending the Fed," which posed an unprecedented challenge to the Fed's independence. With Trump's re-election, there are market concerns that the Fed's policy independence might face greater pressure in the future.
Looking ahead:
The robust performance of the US Dollar Index highlights market confidence in the US economic fundamentals, but its future trend will still depend on the Fed's policy path and changes in the global economic environment. The market generally expects the Fed to be more cautious, possibly pausing the rate-cutting pace in the first quarter of 2024 to address uncertainties in economic data and political pressure. Meanwhile, the strong position of the dollar may further affect the prices of other assets, posing challenges for investor decision-making.
