In the early morning of December 19th, Beijing time, the Federal Reserve announced its final interest rate decision of the year, lowering the federal funds rate target range by 25 basis points to 4.25%-4.50%, aligning with market expectations. However, the Fed significantly raised the median of the future policy rate target range in its statement and indicated that the pace of rate cuts next year will slow significantly, with only two cuts totaling 50 basis points expected. This hawkish signal triggered significant market volatility, causing US stocks and gold and silver prices to plunge, while the dollar and US Treasury yields surged.
Economic Outlook: Slowed Rate Cuts and High Inflation
The Fed's latest economic outlook shows that the US economy is expected to grow by 2.5% in 2024 and 2.1% in 2025, an increase of 0.5 and 0.1 percentage points, respectively, from its September forecasts. The unemployment rate forecast has been revised down to 4.2% in 2024 and 4.3% in 2025. Meanwhile, inflation measured by the Personal Consumption Expenditures (PCE) price index is expected to be 2.4% in 2024, with core inflation at 2.8%, both above the long-term target of 2%.
According to the dot plot prediction, by the end of 2025, the median of the Fed's federal funds rate target range will be 3.75%-4.0%. Compared to the four rate cuts anticipated in September, next year's pace of rate cuts slows significantly, with only two reductions of 25 basis points each.
Market Reaction: Stocks and Gold and Silver Dive, Dollar Strengthens
Under the influence of hawkish rate cuts, all three major US stock indices fell sharply. The Dow Jones Industrial Average plummeted by 1123.03 points, or 2.58%, closing at 42,326.87 points. The S&P 500 Index fell 178.45 points, or 2.95%, to 5,872.16 points. The Nasdaq Composite dropped 716.37 points, or 3.56%, ending at 19,392.69 points.
In commodities, COMEX gold futures fell 2.25%, reporting at $2,602.2 per ounce, while silver futures dropped 3.54%, to $29.825 per ounce. The US dollar index rose by 1% to 108.024, and US Treasury yields rose in tandem, intensifying market pressure.
Powell's Remarks: Cautious Adjustment of Policy Pace
Federal Reserve Chairman Jerome Powell stated at a press conference that the current tightness in the labor market has eased, and significant progress has been made in controlling inflation. He noted that the Fed is close to pausing the rate cut pace, but future policy will still depend on inflation and employment data. If the economy is strong and inflation does not fall further, policy adjustments may slow; conversely, if the economy weakens or inflation drops rapidly, the pace of rate cuts may quicken.
Gold Outlook: Mainly Volatile
A recent report by the World Gold Council forecasts that, although the Fed will continue to cut rates, the upward potential for gold prices may be constrained by competition from the stock and real estate markets. The future trend of gold prices will mainly depend on the purchasing power of global central banks and the strength of demand in the Asia-Pacific region, with prices expected to be primarily volatile in 2024.
Summary and Outlook
The Fed's hawkish stance marks a more cautious adjustment phase in monetary policy, exacerbating market concerns about future economic uncertainties. Investors need to closely watch upcoming economic data and the Fed's policy direction while being alert to the volatility risks in the stock and commodity markets.
