Fed's New Moves: What Lies Ahead for Dollar Assets?

On December 18, 2024, the Federal Reserve made headlines by lowering the federal funds rate by 25 basis points, bringing it down to a range of 4.25% to 4.50%, with a midpoint of 4.375%. This marked the third rate cut for this year, following a 50 basis point reduction in September and another 25 basis points earlier in NovemberAlthough this decrease aligned well with market expectations, it was surprising to see the U.Sstock market fluctuate significantly, initially soaring before retracting sharplyWhat led to this market behavior?

The disappointment stemmed from the details of the Federal Reserve's post-meeting statement, which indicated a cautious approach towards future rate cuts, particularly in 2025. Jerome Powell, the Fed Chair, noted that participants anticipated an appropriate federal funds rate level of 3.9% by the end of next year and a further decline to 3.4% by the end of 2026. This essentially suggests that rates might only be lowered by 50 basis points next year, a stark reduction from the cuts implemented this year, which left many investors unsettled.

The Fed’s tools indicate a heightened expectation that interest rates will remain unchanged in January 2025, with the likelihood now exceeding 93.6%. The reasoning behind the Fed's decision to reduce the pace of rate cuts was highlighted by Powell, who acknowledged that although inflation has moderated, it still remains above the target of 2%. The labor market has also exhibited improvements compared to the shortages faced in 2019, though job creation has slowed to an average of 173,000 new jobs per month over the past three months

The unemployment rate is higher than a year ago, currently at a modest 4.2% as of November.

Further assessments from the Federal Reserve included an upward adjustment of the GDP growth forecast for 2024 to 2.5%, from 2% in September, while for 2025, it was raised to 2.1%. Notably, the inflation forecasts have also been revised upwards, with the core PCE inflation forecast for 2024 adjusted from 2.6% to 2.8% and from 2.2% to 2.5% in 2025. Additionally, this year's unemployment rate was lowered from a previous forecast of 4.4% to a more optimistic 4.2%.

These modifications reflect the Federal Reserve's dual mandate to foster maximum employment while maintaining price stabilityWith room to maneuver, the committee can consider future adjustments more judiciously based on economic conditionsPowell noted that if the economy continues to show strength without inflation moving towards the 2% target, the Fed could proceed cautiously

• The Fall of German Auto Giants
• The Three Phases of Cheetah Mobile
• Satellite Industry Enters Commercialization Era
• Maintaining Cost-Effectiveness in Public Bonds
• Perspectives on Tech Stocks After Rate Cuts

Conversely, if the labor market weakens unexpectedly, or inflation drops faster than anticipated, a more aggressive policy loosening could be enacted.

Meanwhile, the implications of this cautious approach on dollar-denominated assets became evident on the day of the announcementThe U.Sdollar index surged by 1.1%, exceeding the 108.2 level, reaching its highest point since November 2022, while remaining above 108 post-announcementNotably, the dollar strengthened against major currencies, including the euro, Australian dollar, British pound, and Canadian dollarThe elevated rates enforced by the Fed also contributed to shifts in investor behavior, causing funds to flow out of U.Sequities despite initial rises.

Prior to the Federal Reserve's decision, other central banks such as the European Central Bank and the Bank of Canada had also lowered their rates, reflecting concerns over a weak economic outlook that necessitated intervention

Additionally, tariffs have left both European and North American economies apprehensive, prompting their central banks to adopt more accommodative monetary policies to mitigate potential risks, eventually exerting pressure on currency valuations across these regions.

As higher funding costs increasingly compress the return on risk assets, leveraged funds have begun to exit U.SstocksAfter a brief rally, the major U.Sindices faced a downward trajectory as the implications of the Federal Reserve’s statements began to settle inThe Dow Jones Industrial Average experienced a significant drop of 1,123 points, marking a 2.58% decline, continuing its downward trend for the longest stretch this year.

In parallel, the tech-heavy Nasdaq composite index fell by 3.56%, reducing its gains for the year to 29.19%. Shares of Tesla witnessed a pronounced pullback, plummeting by 8.28% and erasing a staggering $127.71 billion in market cap—equivalent to the market value of three Honda Motors

This trend wasn't isolated, as notable tech stocks such as Nvidia and Broadcom also faced declines of 1.14% and 6.91%, respectivelyOther tech stalwarts, including Apple, Microsoft, Google, Amazon, and Meta, saw their shares drop between 2% and nearly 5%.

Interestingly, despite these significant declines during regular trading, indications from after-hours trading suggested a rebound for several prominent stocks, hinting that the market might have started to digest the Fed's hawkish outlookProjection adjustments of assets during after-hours saw Tesla and Nvidia rebound slightly, indicating a potential stabilization in sentiment.

Gold prices faced initial pressure due to the strengthening dollar and high interest rates, momentarily dipping over 2% before recovering above $2,610 an ounce, highlighting the intricate balance between monetary policy and commodity pricingBitcoin, influenced by comments from Powell about the Fed's regulatory stance towards cryptocurrencies, also fluctuated significantly, reflecting volatility in crypto markets.

The interplay of these financial indicators illustrates a pivotal moment for the Federal Reserve's approach to monetary policy as they navigate the complexities of the economy