On the early morning of December 19, in Beijing time, the Federal Reserve convened its Federal Open Market Committee (FOMC) and announced its decision to lower the benchmark interest rate by 25 basis pointsThis adjustment reduced the target range for the federal funds rate from 4.5%-4.75% to 4.25%-4.50%, aligning with market expectations.

This latest decision marks the third consecutive interest rate cut by the Federal Reserve after similar announcements in September and November, bringing the total reduction for the year to 100 basis pointsSuch movements are significant, especially in the context of the ongoing economic landscape in the United States.

However, it is crucial to note that the Federal Reserve has raised its inflation and interest rate outlooks for the next two yearsThe newly released dot plot suggests that the Fed may lower rates twice next year, significantly less than the four reductions initially predicted in September, which indicates a more hawkish stance from the central bank.

Jerome Powell, the Fed Chair, highlighted that the decision to cut rates in December was challenging but ultimately the correct choice

He emphasized that going forward, the Federal Reserve is likely to be more cautious when adjusting policy ratesThe future decisions regarding interest hikes or cuts will depend on upcoming data rather than current forecasts, signifying a shift in the Fed's approach.

Following the announcement, the U.Sdollar index surged, climbing over 1.2%. However, the stock market took a hit, with the three major indices continuing their downward trendThe Dow Jones Industrial Average fell by 1,123.03 points, a 2.58% drop, closing at 42,326.87 points, marking ten straight days of declineThe NASDAQ also declined by 716.37 points or 3.56%, ending at 19,392.69; the S&P 500 saw a drop of 178.45 points, which is a decrease of 2.95%, closing at 5,872.16.

The overall reaction to the Fed's decision and projections showcases a market grappling with the reality of a nuanced economic environment, where inflation and employment metrics are constantly evaluated.

Before the FOMC meeting, market expectations were well-formed regarding the 25 basis point cut, with the Chicago Mercantile Exchange's FedWatch tool indicating that traders anticipated a 97% chance that the Fed would pause any further rate hikes.

The Fed's statement indicated that recent indicators show that economic activity continues to expand at a steady pace

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Since the beginning of the year, labor market conditions have generally loosened, with a rise in unemployment rates, albeit still remaining low overallWhile progress has been made in getting inflation closer to the 2% target, it remains slightly elevated, adding to the complexity of the economic landscape.

The Fed's monetary policies are heavily reliant on inflation and employment dataAs of December 11, the U.SDepartment of Labor reported that the Consumer Price Index (CPI) for November rose by 2.7% year-on-year, aligning with market expectations and remaining above the Fed’s 2% targetThe core CPI, which excludes volatile food and energy costs, grew by 3.3%, maintaining stability for two consecutive months.

When analyzed on a monthly basis, the CPI for November rose by 0.3%, consistent with market predictions and slightly up from the previous month's 0.2%. A notable trend is evident in the services sector, where inflation appears to be cooling off

For instance, rent growth, a key factor in driving up prices over the past two years, saw a mere 0.2% increase in November, the smallest increase since July 2021.

Currently, inflation in the U.Scontinues its moderate upward trend and aligns with market expectations, providing further justification for the Fed's decision to proceed with the interest rate cut this month.

Shifting focus to the labor market, the unemployment rate in November rose by 0.1 percentage points to 4.2%, consistent with expectations, marking the highest level since August, with 7.1 million individuals unemployedThese figures are higher than those from the previous year when the unemployment rate stood at 3.7%, equating to about 6.3 million unemployed persons.

Despite the Fed's decision to cut rates this month, this decision was not unanimously supported by all 12 FOMC voting members

Beth Hammack of the Cleveland Fed cast a dissenting vote, favoring unchanged interest rates and advocating for a pause in the rate cuts.

The pace of future adjustments appears to be on a slower trajectory.

The latest dot plot from the Federal Reserve shows varying perspectives among the 19 officialsOne official believes there should be no rate cuts in 2025, while others forecast varying degrees of cuts, ranging from 25 basis points to 125 basis pointsThis forecast reflects a more cautious approach towards managing the economy moving forward.

The median expected target range for the policy rate by the end of 2025 is now projected to be 3.9%, up from 3.4% estimated in SeptemberSimilarly, the expectation for the end of 2026 has also risen to a median of 3.4%, compared to the earlier estimate of 2.9%.

This change implies that there will likely be only two 25-basis-point rate cuts next year, which is a reduction from the four anticipated in September.

Moreover, compared to the previous FOMC statement in November, a significant modification in this announcement is the introduction of “degree” and “timing” when discussing future interest rate adjustments.

The Federal Reserve clarified that, when considering new adjustments to the federal funds rate target range, a meticulous evaluation of future data, the evolving economic outlook, and risk balance would be undertaken.

Powell pointed out that the inclusion of terms regarding the "degree and timing" of adjustments signifies that the Fed is either at or nearing a point of slowing rate cuts

This gradual reduction in pace reflects higher economic data this year and rising inflation expectations for the coming yearFuture rate cut decisions will heavily rely on prevailing economic data.

Gennadiy Goldberg, a U.Sinterest rate strategist at TD Securities, remarked that the Fed has signaled a departure from a previous stance characterized by numerous cuts; they are now inclined to exercise caution regarding future cuts in the coming yearHe interpreted this as a message that the market may continue pricing in fewer than two cuts if economic data remains robust and might even approach a zero-cut scenarioIf inflation does not trend downward sufficiently, the Fed seems reluctant to continue reducing interest rates.

Exploring the impact of tariffs on inflation adds another layer of complexity to the current economic discussions.

Analysts highlight that the CPI data for November indicates it has significantly decreased from the peak of 9.1% in June 2022, yet the pace of bringing it down towards the Fed’s 2% target has slowed in recent months.

Bill English, a professor at Yale University and former head of the Fed's Monetary Affairs, stated, “Based on our observations over the past few months, the economy appears slightly strong and inflation seems marginally high, which indicates a slower pace of rate cuts.”

In terms of the employment landscape, Powell noted that the labor market has cooled from an overheating status and that inflation is closer to the 2% target

Though unemployment rates have risen, they are still maintained at comparatively low levelsThe labor market is not pressuring inflation in the present context.

CITIC Securities suggests that based on the employment diffusion index, the U.Slabor market shows signs of slight recoveryThe index, which represents job growth across the private sector, has been declining since 2022 but has recently seen an uptick, mirroring improvements in the manufacturing sector’s PMI.

Concerning economic forecasts, the Federal Reserve has raised its GDP and personal consumption expenditure (PCE) inflation outlook for the coming two years while reducing projected unemployment ratesThese adjustments reflect a nuanced shift in its economic predictions.

Specifically, the projected PCE inflation rate for 2024 is now at 2.4%, which is a 0.1 percentage point increase from the previous estimate of 2.3% made in September

For 2025, the expectation has surged to 2.5%, up by 0.4 percentage points from the prior forecast of 2.1%.

Similarly, core PCE expectations for 2024 increased by 0.2 percentage points to 2.8%, and those for 2025 also showed an uptick from 2.2% to 2.5%.

As for unemployment, the expected rate for 2024 is now at 4.2%, a decrease from the September prediction of 4.4%. For 2025, the expectations have been revised slightly down to 4.3% from 4.4%.

Lastly, the expected growth rate for GDP in 2024 has been revised up to 2.5%, compared to the earlier expectation of 2.0%, while the outlook for 2025 has risen marginally to 2.1% from a previous forecast of 2.0%.

Goldman Sachs economists believe that the implemented tariff measures could raise the core inflation rate by approximately 0.3 percentage points in the coming year