The international financial landscape is in a state of flux as central banks around the globe release their latest monetary policy decisionsOn December 19, 2023, Eastern Standard Time, the Federal Reserve of the United States unexpectedly opted for a 25 basis point cut in interest rates, even while maintaining a hawkish stance regarding its 2025 monetary policy outlookJust hours earlier, the Bank of Japan decided to keep its policy rate unchanged at 0.25%, reflecting a cautious approach amidst ongoing economic challengesMeanwhile, the Swedish Riksbank announced a cut of 25 basis points, bringing their rate to a two-year low of 2.5%, and later that day, the Bank of England opted to keep its benchmark rate at 4.75%, marking a significant divergence in monetary policy strategies among these major economies.

Experts in the field suggest that this differentiation in monetary policy among leading central banks could become even more pronounced by 2025. Recent economic data from the US has outperformed expectations, which raises the specter of inflation risks and may lead the Federal Reserve to reconsider the pace of its rate cuts

In contrast, the eurozone, which is grappling with sluggish consumption and industrial activity, is expected to maintain its accommodative monetary stance with substantial rate reductionsJapan, for its part, seems poised for a normalization of its monetary policy, offering a stark contrast to its Western counterparts.

On the evening of December 19, as markets reacted to these announcements, US stock indexes opened positively but soon took a step backThe S&P 500 index recorded an increase of 0.64%, the Dow Jones rose by 0.49%, and the Nasdaq climbed by 0.83%. This shift in market dynamics indicates how investors are digesting the multifaceted signals from central banks.

The reactions from various central banks illustrate notable contrastsThe Bank of England, for instance, reached a decision to maintain its base interest rate at 4.75% with a voting outcome of 6-3. This indicates a considerable division among its monetary policy committee, with three members advocating for a 25 basis point cut

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It should be noted that the cumulative reduction in the Bank of England's rates this year has only amounted to 50 basis points, a figure significantly lower than the reductions seen from other major central banks.

The Bank of England has conveyed expectations that the overall Consumer Price Index (CPI) inflation rate will experience a slight uptick in the short term, while the year-end GDP growth might fall short of previous forecastsThe central bank's Governor, Andrew Bailey, emphasized the importance of a "gradual" approach to future rate cuts, stating that the committee will continue to closely monitor the persistent risks associated with inflation.

On the same day, the Riksbank of Sweden made a notable adjustment, lowering its benchmark interest rate by 25 basis points to a two-year low of 2.5%. The Riksbank signaled that it will "carefully assess the need for further rate cuts" and suggested that another reduction might occur in the first half of 2025, dependent on the inflation and economic activity outlook.

Japan’s monetary direction appears to be markedly different, as the Bank of Japan maintained its policy rate at 0.25%, marking the third consecutive meeting without an adjustment

This decision was made with an overwhelming 8-1 vote, reflecting a consensus on the need for continued stimulus amidst Japan's unique economic challenges.

The Federal Reserve, meanwhile, implemented its third consecutive rate cut, reducing the target range for the federal funds rate by 25 basis points to between 4.25% and 4.50%. Nevertheless, through its statement, economic forecasts, and press conference, the Fed communicated an overall hawkish tone, suggesting a cautious optimism despite the cuts.

Kristina Hooper, the Chief Global Market Strategist at Invesco, has articulated that by 2025, the differentiation in monetary policies of the Federal Reserve, the European Central Bank (ECB), and the Bank of Japan could further expandShe pointed out that the relationship between currencies is largely driven by two core factors: differences in interest rates and growth rates.

Hooper posits that if economic growth in the eurozone remains lackluster in the coming year, the ECB is likely to adopt a substantially accommodative monetary policy, resulting in a weaker euro against the US dollar

Conversely, Japan may find room for monetary policy normalization, which could lead to an appreciation of the yen against the dollar in a measured mannerShe anticipates that the Bank of Japan may undertake some tightening measures in the future.

On the whole, the outlook for the US stock market appears cautiously optimisticAfter experiencing a drop in prices overnight, US equities seem to have rebounded, with cryptocurrencies flashing stronger performances as wellBy the time of reporting, shares of companies linked to the cryptocurrency sector surged, with Bakkt Holdings seeing a jump of over 9% and several other significant players showcasing robustness in their market performance.

Reflecting on the 2025 horizon for the US stock market, a macro research director from an international institution noted that the more hawkish the Fed’s stance becomes amidst rate cuts, the greater the challenges the market encounters