On November 18, the Federal Reserve announced a reduction in the target range for the federal funds rate by 25 basis points, bringing it down to a range of 4.25% to 4.50%. This marks the third consecutive rate cut since September and the final cut for the yearThe implications of this decision resonate widely, raising questions about what signals the Fed is sending to the market and how this will impact financial landscapesAs we look ahead, what can we expect from the Fed's monetary policy in the coming year?

The recent rate cut aligns with expectations, but the dynamics behind this decision capture significant attentionThe Federal Open Market Committee (FOMC) delivered two major signals regarding its monetary policy direction.

Firstly, the Fed's stance indicates a more cautious approach to future rate cutsDuring the latest meeting, there were rare dissenting voices among the committee members, most notably from Cleveland Fed President Loretta Mester, who favored keeping rates steady

Fed Chair Jerome Powell characterized this decision as “a risky one,” stating that moving forward, the Fed would be prudent in contemplating further cutsMost committee members predict that by the end of 2025, the federal funds rate might further reduce to a range of 3.75% to 4%, suggesting a significant slowdown from an earlier prediction of four cuts for the following year to only two.

Aditya Bhave, a senior global economist at Bank of America, noted that while the 25 basis points reduction met expectations, it also carried a notably hawkish toneThe frequency of anticipated rate cuts was clearly adjusted downward, reflecting an overall shift in the Fed's attitude.

The second signal indicated by this monetary policy action is the Fed's growing worry about inflation in the United StatesChair Powell acknowledged that although inflation has significantly cooled, progress has been “frustratingly slow,” falling short of expectations

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In the Fed's latest economic outlook, they revised upward the predictions for inflation rates this yearThe core inflation rate, which strips out food and energy costs, is now expected to sit at 2.8%, up from previous estimates, highlighting that both inflation metrics exceed the long-term goal of 2% set by the Fed.

The Financial Times reported that the Fed aims to rein in inflation without negatively impacting the job market or the overall economyHowever, the trajectory of declining inflation has shown signs of flattening, with Powell stating that inflation seems to be “moving sideways.”

The recent cut and the Fed's cautious outlook have profound implications for financial marketsFollowing the announcement, the U.Sdollar surged, and international financial markets experienced considerable volatilityBoth U.Sand Asia-Pacific stock indices saw significant declines, with prices for commodities such as gold, oil, and cryptocurrencies also taking a hit.

The dollar index rose sharply on November 18, recording a 1% increase against a basket of six major currencies, closing at 108.024. The three major indexes on the New York Stock Exchange all faced declines of over 2.5% on the same day

The Dow Jones Industrial Average fell more than 1100 points, representing a 2.58% dipThis decline marks the 10th consecutive trading day of losses, setting a 50-year record for prolonged descentSimilarly, the S&P 500 and Nasdaq composite indexes dropped by 2.95% and 3.56%, respectively, as the dollar index hit a two-year high.

As a result of the Fed’s actions, the Asia-Pacific stock markets, including those in Japan, South Korea, and Australia, all experienced downturnsThe Nikkei 225 index in Japan opened down by 1.4%, the KOSPI in South Korea dropped by 2.3%, and Australia’s stock index declined by over 2%.

Market analysts suggest that despite the Bank of Japan's decision to maintain its policy rate during its monetary policy meeting, there is widespread expectation that an increase may occur within the next three monthsOn the cryptocurrency front, Bitcoin saw a significant drop in value after Powell indicated a disinterest in the Fed’s involvement with government reserves of Bitcoin.

As for oil prices, a hawkish stance from the Fed led to a decline, with West Texas Intermediate crude falling back to around $70 per barrel

The price of gold also faltered, dipping below the 100-day moving average.

Looking toward next year, market observers speculate that even though the Fed's latest projections suggest two additional rate cuts, the uncertainty stemming from the new U.Sgovernment may complicate the monetary policy landscape furtherPowell acknowledged this uncertainty, mentioning expected policy changes that could alter the Fed's rate trajectoryHe said the Fed is “thinking through these questions,” but comprehensive answers may not be forthcoming in the near future.

Upon taking office, the new administration plans to levy tariffs on goods from trade partners and increase immigration control, strategies likely to elevate import costs and domestic prices, which could cloud the inflation outlook furtherBank of America’s Bhave maintains their prediction of two rate cuts next year but does not dismiss the potential for fewer or even no cuts at all.

Goldman economists anticipate that the new tariffs could raise core inflation by 0.3 percentage points over the next year, pushing inflation further away from the Fed’s long-term targets

In such circumstances, the need for additional rate cuts would diminish.

Wells Fargo's chief economist, Jay Bryson, pointed out that the Federal Reserve's rate projections appear widely dispersed, reflecting the impact of the new government's uncertain policy agendaUnless unexpected developments arise, it is likely the Fed will maintain steady rates at next month’s meeting, leading to a noticeably slowed rate of cuts thereafter.

Michael DePasquale, head of global rates trading at Castle Securities, remarked on the challenging period for the Fed as it tries to navigate monetary policyWith rising inflation expectations juxtaposed against rate cuts, reconciling these conflicting pressures proves complexThe journey for the Federal Reserve throughout 2024 remains to be observed keenly as policymakers balance economic growth with inflation control in an uncertain environment.