As the Federal Reserve cut interest rates by 25 basis points as expected at the December meeting, the federal funds target rate range was lowered to 4.25%-4.50%, drawing widespread market attention to its rate cut path. According to the latest economic projections (SEP), the Federal Reserve released a "hawkish" signal, indicating that future rate cuts will be more cautious. This policy path adjustment could strengthen the dollar's dominant position and bring a new wave of impact on global non-US economies.
Divergence in Fed's Rate Cut Path and Market Expectations
Although the Federal Reserve has cumulatively cut rates by 100 basis points, its latest dot plot shows a reduction of 50 basis points in 2025, with the terminal rate rising to 3.1%. Additionally, the rate-cutting cycle extended to 2027, with the neutral rate further raised to 3.0%. This policy adjustment is mainly based on the forecast for future inflation and the job market: in 2025, the PCE inflation rate is projected at 2.5% and the unemployment rate drops to 4.3%. These figures suggest that the US economy is still in a "soft landing" process, with inflation gradually declining.
However, there is a clear divergence between market expectations for the rate cut path and the Federal Reserve. Since the rate cut in September, the yield on US 2-year Treasury bonds has risen from 3.6% to 4.3%, with the yield curve rising significantly, reflecting a more cautious market expectation regarding the magnitude and timing of rate cuts. This phenomenon indicates that the market has readjusted its expectations for the Fed's policy path, suggesting that the "Taylor rule" still influences Fed decisions.
Asymmetric Rate Cut Path and Dollar Pressure
Historically, the Federal Reserve's rate cycle usually exhibits symmetry, with rate cuts greater than hikes. However, this rate cycle will become a rare asymmetric rate cut path, where cuts significantly lag behind hikes. A similar situation only appeared from 1994 to 1998 when the Fed even raised rates twice during a rate-cut cycle. Although Powell clearly stated there would be no hikes in 2025, the market has not fully accepted this assumption, as the US debt yield curve continues to rise.
In a high-interest-rate environment, the dollar's dominant position will be further solidified. If Trump wins the election and restarts a global "tariff war", non-US economies might face a scenario of "weak currency, weak export, strong inflation", putting more pressure on economic growth. The International Monetary Fund (IMF) warned in its October "World Economic Outlook" that an unexpected tightening of global financial conditions could drag growth by 0.5 percentage points.
Potential Impact of a Strong Dollar on the Global Economy
A strong dollar could negatively affect global trade and weaken the ability of non-US economies to stimulate economic growth through interest rate policies. In the current environment, non-US economies may face higher financing costs, currency depreciation, and inflationary pressures, especially in emerging market countries reliant on exports.
Outlook and Risk Warning
The Fed's rate cut path is closely related to the global economic situation. In the future, the market needs to pay attention to the Fed's dynamic assessment of the job market and inflation, as well as any corresponding policy adjustments. Additionally, trade policies that may be adopted by the Trump administration will also be important variables affecting the global economy and financial markets. For non-US economies, addressing the challenges posed by a strong dollar will be a key issue.
