Fed Cuts Interest Rate by 0.25%P for Third Consecutive Time
Next Year's Expected Rate Cuts Reduced from 4 to 2
Powell Says "Monetary Policy Less Restrictive... Will Move Slowly"
New York Stock Market Plummets Shocked by 'Hawkish Cut'
US Treasury Yields Surge... 10-Year Hits 4.5% for First Time in Six Months
The U.S. central bank, the Federal Reserve (Fed), has significantly reduced its forecast for the number of interest rate cuts next year from four to two. Although it lowered rates by 0.25 percentage points for the third consecutive time, it indicated that the pace of monetary easing would slow down due to recent inflation increases and a robust labor market. Fed Chair Jerome Powell also reaffirmed that the decision was a 'hawkish (monetary tightening-preferred) cut,' leading to a broad decline in the New York stock market and a sharp rise in U.S. Treasury yields, with the 10-year yield surpassing 4.5% for the first time in six months. Wall Street expects the Fed to temporarily pause rate cuts in January next year and resume monetary easing in March.
U.S. Fed Cuts Rates Three Times in a Row... Next Year’s Cut Forecast Reduced from 4 to 2
On the 18th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it decided to lower the federal funds rate from 4.5?4.75% to 4.25?4.5%. This follows a 0.5 percentage point cut from 5.25?5.5% in September, marking the first reduction in two and a half years, with additional 0.25 percentage point cuts 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.
However, the rate cut was not unanimous. Among the 19 members participating in the FOMC meeting, four argued that the rate cut was unnecessary under the "appropriate monetary policy" stance. Beth Hammack, President of the Cleveland Federal Reserve Bank and one of the 12 voting members, voted against the cut, advocating for a rate hold. Chair Powell hinted at dissent by stating at the post-FOMC press conference, "It was a closer call, but our decision today was the right one."
In the policy statement, the Fed assessed that "labor market conditions have generally eased since early this year, and the unemployment rate has risen but remains low," and that "inflation has made progress toward the 2% target but remains somewhat elevated." The committee also stated it aims to achieve maximum employment and 2% inflation in the long term.
Since a 'small cut' (0.25 percentage point) was expected, the key focus of this FOMC was the dot plot showing members’ rate projections. The Fed raised the median year-end rate forecast for 2025 from 3.4% in September to 3.9%. Previously, it had expected four 0.25 percentage point cuts next year, but now it anticipates only two such cuts. The 2026 rate forecast was raised from 2.9% to 3.4%, and the 2027 forecast from 2.9% to 3.1%. The medium- to long-term rate forecast was also raised from 2.9% to 3.0%.
The revision in rate cut expectations was due to recent inflation increases and the U.S. economy’s steady growth. In the updated Summary of Economic Projections (SEP) released the same day, the Fed raised its forecast for next year’s core Personal Consumption Expenditures (PCE) price index increase to 2.5% and GDP growth to 2.1%, up 0.3 and 0.1 percentage points respectively from previous estimates. The year-end unemployment rate forecast was lowered from 4.4% to 4.3%. The Fed’s more cautious stance on monetary easing is also interpreted as reflecting increased uncertainty, including concerns about 'Trumflation' (price increases caused by policies such as tariffs and immigration restrictions under President Donald Trump’s administration).
Powell Signals Caution on Further Cuts Due to Inflation Rise... Reflects Trump Administration’s Second-Term Policies
At the press conference, Chair Powell repeatedly signaled a slowdown in the pace of monetary easing. He said, "With today’s action, the policy rate is 1 percentage point lower than its peak, and monetary policy is now significantly less restrictive," adding, "From here, we enter a new phase, and we will be cautious about further rate cuts." He cited rising inflation as the reason for lowering the expected number of rate cuts next year, explaining, "FOMC members will consider inflation progress when reviewing additional rate cuts."
Regarding the series of easing measures, Powell said, "We moved very quickly to get here," and "Going forward, we expect to move more slowly." On the current U.S. economy, he assessed, "We think the economy is in a really good place," and "Policy is also in a very good place."
The Fed also acknowledged that the release of the dot plot and SEP alongside the rate cut decision partly reflected the economic policy impact of the Trump administration’s second term. Powell said, "Some FOMC members have begun to factor in the next administration’s policy impact," but added, "We can only evaluate after seeing how policies are actually implemented, and we have not reached that stage yet."
‘Hawkish Cut’ Shocks New York Stock Market... U.S. 10-Year Treasury Yield Surpasses 4.5%
The Fed’s hawkish rate cut triggered a sharp drop in the New York stock market. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed down 2.58% from the previous trading day. The large-cap S&P 500 index fell 2.95%, and the tech-heavy Nasdaq index slid 3.56%. U.S. Treasury yields surged, with the 10-year yield exceeding 4.5% for the first time in six months since June. The 10-year U.S. Treasury yield, a global bond yield benchmark, rose 0.13 percentage points to 4.51%, while the 2-year yield, sensitive to monetary policy, increased 0.1 percentage points to around 4.34%.
Investors quickly lowered expectations for rate cuts, making a rate hold in January next year almost a foregone conclusion. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market reflected a 93.6% probability that the Fed will hold rates at the January FOMC meeting, with only a 6.4% chance of a 0.25 percentage point cut.
David Russell, Chief Global Market Strategist at TradeStation, said, "There was no Christmas cheer from the Fed," adding, "Since rates are no longer clearly restrictive, it is logical to pause cuts now." Whitney Watson, Co-Chief Investment Officer (CIO) of Bonds and Liquidity Solutions at Goldman Sachs Asset Management, said, "The Fed ended the year with three consecutive rate cuts, but the new year’s resolution seems to lean toward more gradual easing," and predicted, "The Fed will hold rates in January and resume cuts in March."
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