As anticipated, the Federal Reserve has executed its third consecutive interest rate cutHowever, the volume and frequency of cuts projected for the upcoming year have caught the market off guardJerome Powell, the Fed Chair, acknowledged that the decision made the day of the meeting was narrowly won, indicating that the Fed is likely to slow down the pace of rate reductions next yearThis hawkish sentiment triggered a significant plunge in U.Sstocks, while non-dollar currencies collectively weakenedThe Fed now grapples with its dual mandate: managing inflation close to the 2% mark while ensuring a robust labor market.

The outlook for interest rates has left investors disillusioned.

In the early hours of December 19, after a two-day policy meeting, the Federal Reserve announced a 25 basis point cut, adjusting the target range for the federal funds rate to between 4.25% and 4.5%. However, the Fed stated it anticipates only two rate cuts in 2025, a reduction from the previously projected four cuts.

According to the Fed's dot plot, which reflects individual members' interest rate projections, two rate cuts of 25 basis points each are expected in 2025, while the forecasts for 2026 remain consistent with two cuts as well

The change in expectation reflects a tightening of the Fed's monetary policy outlook.

The financial markets reacted dramatically to the Fed's announcement, with all three major stock indices experiencing turmoilBy the close of trading that day, the Dow Jones Industrial Average plummeted over 1,000 points, marking a decline of 2.58% and extending its losing streak to ten days — the longest since 1974. The Nasdaq saw a drop exceeding 700 points (3.56%), while the S&P 500 fell by 2.95%. The disappointing outlook from the Fed significantly rattled the stock market, with the Dow entering a historical low.

Apart from the stock market, currencies of several major economies weakened against the dollarThe Bank of Japan decided to maintain its current policy rate during its meeting on the 19th, undermining widespread expectations that an increase was imminentConsequently, the yen fell below the pivotal exchange rate of 155 against the dollar

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The South Korean won also dropped 1.5%, trading at 0.00069 dollars per won — the weakest level since March 2009. Similarly, the British pound and the euro faced declines in their exchange rates.

Furthermore, Brent crude oil futures saw a decline of $1.20 from the daily high, closing at $72.62. According to the gold price index, spot gold fell by 0.72% to $2,618.78 per ounce, dipping below the 100-day moving average.

The future moves of the Federal Reserve are now subject to the performance of U.Seconomic policies.

This recent rate cut marks the third consecutive reduction since September, with prior reductions of 50 and 25 basis pointsMarket expectations are that the Fed has concluded the initial phase of its rate-cut cycle and that future monetary policy will largely hinge on the impact of U.Seconomic measures on inflation and employment.

Policies such as domestic tax cuts combined with increased tariffs can elevate the inflation rate in the U.S., thus creating greater complications for the Fed's monetary policy

For instance, tariff measures contribute significant uncertainty to global trade and investment policies, further complicating the economic outlook for the United States.

In his press conference, Powell mentioned that the Fed has reduced rates by 1 percentage point from their peak, allowing for a notably more accommodative policy stanceConsequently, any further adjustments will be approached with cautionHe noted that the slowing of rate cuts next year reflects an increase in inflation expectationsDrawings conclusions from the effects of tariffs remains premature, as their target nations, scale, and duration are yet uncertainHe emphasized the need to continue restrictive measures to reach the 2% inflation goal, which could take a year or two.

Officials at the Federal Reserve, along with analysts from various institutions, remain restrained regarding the prospects for rate cuts next year

Some officials suggest they need to witness concrete evidence demonstrating improvements in inflation or declines in the labor market before proceeding with further reductions in borrowing costsFor instance, Loretta Mester, a Cleveland Fed President, recently remarked that they may have already reached or are close to the point where they should moderate the pace of reductionsShe referenced rapid reductions from the Fed in the 1990s, where cumulative cuts equated to 75 basis points before a pause.

The CME Group's FedWatch Tool currently suggests that traders only assign a 16.3% likelihood to a further reduction to a range of 4% to 4.25% in JanuaryThis indicates that market investors generally believe the Fed will pause its rate-cutting momentum come January.

Commenting on this Fed rate cut, Yang Delong, the Chief Economist of Qianhai Kaiyuan Fund, stated that risks of U.Sstock peaks are rising

He suggested that recent cuts primarily aim to support a rebound in American employment and assist an economic recoveryLong-term, however, the Fed may need to continue reducing rates to stave off potential risks of a hard landing for the economy.

Market expectations were for a hawkish tone at the meeting, but the information presented was evidently more hawkish than anticipatedPowell's comments suggest the Fed is in a relatively ambiguous phase, dragging down market sentimentsIn the short term, in light of unclear Federal Reserve guidance, optimistic holiday trading sentiments in U.Sequities may be short-lived, leading to an anticipated increase in market volatility.

The reverberations from the rate cut resonate beyond the Fed's own bordersWith projections of the Fed's benchmark interest rate falling to a range of 3.75% to 4%, it will still remain above the levels of most major economies globally, consequently impacting the scale and pace of capital inflow into emerging markets and putting further pressure on their currency exchange rates.

Since March 2024, when Switzerland initiated the first cuts among major developed economies, countries including Sweden, Canada, the UK, the EU, the U.S., and New Zealand joined the wave of easing, facilitating a new cycle of global rate reductions

This trend is providing essential liquidity support for equity markets.

According to Invesco's Chief Global Markets Strategist, after rapidly raising rates to restrictive levels to counter severe inflation, it seems that global central banks can declare victory in their fight against inflationHowever, signs of slowing growth have emerged in many major economies, leading certain central banks to commence rate cuts in the latter half of this year amid some weak data.

Analysts observe that similar to the Fed's statement, as rates persist in declining and domestic inflation continues to cool, several overseas central banks have hinted at a potential slowdown in future cuts while concurrently easing rates.

By 2025, a tug-of-war scenario may unfold: on one hand, economic activities will experience deceleration from previous rate hikes; on the other, the rate-cutting cycle could provoke positive effects