In the early hours of Thursday Beijing time, the Federal Reserve announced a 25 basis point cut in the federal funds rate target range to 4.25%-4.5%, marking the third rate cut of the year, in line with market expectations. However, after the rate cut announcement, the dollar strengthened, while US stocks, gold, and silver experienced an unusual simultaneous decline.
Market Reaction:
Following the Fed's rate cut announcement, the US dollar index rose, putting pressure on non-US currencies. The USD/CAD briefly touched 1.44, the highest since March 2020, with an intraday increase of 0.63%. The USD/CNY offshore exchange rate fell below the 7.3 mark. Meanwhile, all three major US stock indices declined. At the time of writing, the Dow, Nasdaq, and S&P 500 fell by 0.39%, 0.44%, and 0.46%, respectively. In commodities, spot gold fell nearly $22 in the short term, quoted at $2618.799 per ounce, and spot silver plunged more than 2%, quoted at $29.937 per ounce.
Underlying Causes:
Despite the rate cut being within market expectations, investors focused more on the future path of rate cuts. After the Fed's rate decision, the market broadly expected that the extent of rate cuts in 2025 would be significantly reduced compared to previous estimates. Additionally, US interest rate futures show that the market sees a greater than 90% chance that the Fed will pause rate cuts in January next year, up from 81% before the rate cut announcement.
For future policy, Goldman Sachs Chief Economist Jan Hatzius's latest report removed the expectation of a rate cut by the Fed in January next year, predicting that the Fed will cut rates three times in total in March, June, and September. This adjustment reflects investors' concerns about a slower pace of rate cuts, thereby causing significant market volatility.
Powell's Remarks:
Federal Reserve Chairman Jerome Powell noted in a press conference that the overall performance of the US economy is strong, with the labor market cooling from overheating, and the job market not being the main source of current inflation. He stated, "We do not need to further cool the labor market to achieve a 2% inflation target."
Powell also mentioned that the Fed's policy stance is less restrictive, providing room for more cautious rate adjustments. He stressed that the Fed does not have a preset course for future rates and will adjust policy based on economic data. The rate statement specifically added language about "adjustment magnitude and timing," suggesting the Fed may be at or near a point of slowing rate cuts.
Future Outlook:
The slowdown in the pace of rate cuts not only reflects the rise in economic data in 2023 but also shows an increase in inflation expectations for 2024. According to the Fed's latest projections, the rate cut in 2025 may be only 25 basis points or less, significantly different from previous expectations. The adjustment of rate cut expectations may become a key driver of future market volatility.
The market performance following this rate cut indicates that while the Federal Reserve's policy has bolstered the dollar in the short term, the uncertainty over future policy has already profoundly impacted asset price trends, particularly in the stock and precious metals markets.
