Base Interest Rate Set at 4.25~4.5% Annually... Third Consecutive Cut
Expected Rate Cuts Next Year Reduced from 4 to 2
New York Stock Market Falls Uniformly on 'Hawkish Cut'
The U.S. Federal Reserve (Fed) lowered the benchmark interest rate by 0.25 percentage points as expected, marking the third consecutive cut. Through the dot plot reflecting rate cut expectations, the number of anticipated cuts next year was sharply reduced from four to two. As it was confirmed that this rate cut was a 'hawkish cut'?essentially a preemptive move to slow down the pace of monetary easing next year?the New York stock market is broadly declining.
On the 18th (local time), the Fed announced in its policy statement following the Federal Open Market Committee (FOMC) regular meeting that it decided to lower the federal funds rate from the previous 4.5?4.75% range to 4.25?4.5%. After cutting the rate by 0.5 percentage points from 5.25?5.5% in September for the first time in two and a half years, it further reduced the rate by 0.25 percentage points in November and this month. As a result, the interest rate gap with South Korea narrowed to 1.5 percentage points at the upper bound.
In the policy statement, the Fed assessed that "economic activity continues to expand at a solid pace," and "labor market conditions have generally eased since early this year, and the unemployment rate has risen but remains low." Regarding inflation, it evaluated that "progress has been made toward the 2% target, but it remains somewhat elevated."
The Fed stated, "The Committee seeks to achieve maximum employment and 2% inflation over the longer run," adding, "The economic outlook is uncertain, and the Committee is attentive to risks to both sides of its dual mandate."
The key point of the day was the dot plot reflecting rate cut expectations. The dot plot represents the interest rate projections of all 19 FOMC members, including those who do not vote, shown as dots. In this dot plot, the median year-end 2025 rate forecast was raised from 3.4% presented in September to 3.9%. Previously, in September, the Fed expected four 0.25 percentage point rate cuts next year, but this time it signaled only two 0.25 percentage point cuts.
The Fed had previously indicated a cautious shift toward monetary easing several times. With recent inflation slowdown stalling and the labor market remaining stronger than expected, Wall Street increasingly anticipated that the Fed would reduce the number of rate cuts next year. Concerns about 'Trumflation'?the possibility that tariffs and illegal immigration bans under President-elect Donald Trump, who takes office in January next year, could push prices higher?also contributed to the spread of this outlook.
The Fed also updated its Summary of Economic Projections (SEP), which is released quarterly and includes GDP, inflation, and unemployment forecasts. The inflation forecast for this year, based on the core Personal Consumption Expenditures (PCE) price index, which the Fed closely monitors, was raised by 0.2 percentage points from the September forecast to 2.8%. The GDP growth forecast for this year was revised upward from 2.0% to 2.5%. The year-end unemployment rate forecast was lowered from 4.4% to 4.2%.
As the Fed reduced the expected number of rate cuts next year from four to two, the New York stock market is broadly declining. As of 2:24 p.m. on the day, the Dow Jones Industrial Average, centered on blue-chip stocks, was down 0.39% from the previous trading day. The large-cap S&P 500 index and tech-heavy Nasdaq index were down 0.48% and 0.44%, respectively.
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