The Federal Reserve slashed interest rates by a quarter of a percentage point but indicated a more gradual pace of easing in the coming year. This move caused the dollar to surge to a two-year high and triggered a sell-off in both US and international stocks.
The Federal Open Market Committee voted on Wednesday to lower the benchmark rate to a range of 4.25-4.5 per cent, marking its third consecutive cut. Cleveland Fed president Beth Hammack dissented, preferring to keep rates unchanged.
Forecasts for rates in 2025 suggested fewer cuts than previously anticipated, reflecting the Fed’s concerns about persistent inflation. Policymakers also revised their inflation estimates upwards for the next year.
“This was a distinctly hawkish message from the Fed,” said Aditya Bhave, senior US economist at Bank of America, highlighting the shift in officials’ projections for rate cuts in 2025.
JPMorgan Chase observed that money markets now predicted only 0.31 percentage points of cuts in 2025, a more hawkish outlook compared to their forecast of 0.75 percentage points.
Following the decision, Wall Street stocks experienced significant declines, with the S&P 500 index and Nasdaq Composite both dropping. Shares of major companies like Tesla, Facebook, and Amazon also fell.
Asian stock markets similarly declined in early trading on Thursday, with South Korea and Taiwan’s benchmark indices facing losses.
US government bonds saw a price drop, with the two-year Treasury yield rising. Additionally, the dollar strengthened against a basket of currencies.
Fed chair Jay Powell noted that the central bank’s policies were less restrictive and policymakers would proceed with caution in considering further easing. Inflation was stable, and concerns about the labor market had diminished.
Overall, the Fed’s goal remains to manage inflation while supporting the job market and economy. Forecasts suggest a reduction in the policy rate by 2026, along with increased expectations for core inflation and the unemployment rate.
The Fed’s decision reflects a shift in economic outlook and policy stance as they navigate the impact of various factors on inflation and growth.
The Fed’s recent adjustments to monetary policy reflect their progress in managing inflation while assessing the impact on growth and the labor market.
Additional reporting by Eva Xiao in New York
