In a highly anticipated move during the last Federal Reserve meeting of 2024, the central bank decided to cut interest rates by 25 basis pointsThis marks the third consecutive cut for the institution, which had previously lowered rates by 50 and 25 basis points in earlier meetings this yearThe decision, while not unexpected, sent ripples through financial markets, as investors digested the implications of a potentially shifting trajectory for monetary policy.

Federal Reserve Chairman Jerome Powell, following the two-day meeting, conveyed that the US economy remains robust despite persistent inflationary pressuresAlthough there has been a softening in the labor market, overall stability prevailsPowell highlighted the dual risks facing the economy: the potential resurgence of inflation alongside signs of weakness in the labor marketThe Fed is committed to a cautious approach to policy adjustments as it navigates this uncertain economic landscape.

Commentary from analysts has been varied yet insightful

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For instance, the research team at Citic Securities indicates that the Fed has raised its GDP growth expectations for the United States for 2025 to a median of 2.1%, a slight increase from their previous forecastConcurrently, they've adjusted the unemployment rate projection for next year downwardIn terms of inflation, the Fed's outlook for the Personal Consumption Expenditures Price Index (PCE) has been revised upward, indicating growing concern about inflation dynamics going forward.

Kristina Hooper, Chief Global Market Strategist at Invesco, expressed that while expectations of economic growth near potential levels remain in place, prolonged restrictive monetary policy means that any changes will have a tempered effect in the short termDespite this, strong labor market conditions and healthy household balance sheets could support consumer spending and broader economic growth.

In contrast, Cheng Shi, Chief Economist at ICBC International, pointed to signs of fatigue as tighter monetary policy continues to manifest its lagging effects on the economy

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Following a peak in growth during the second quarter of this year, a reduction was noted in the third quarterWhile short-term policy stimuli may provide a temporary boost, persistent challenges such as trade protections, a tightening labor market, and cumulative high interest rates could hamper economic growth in the long run.

Following the announcement of the Fed's decision, U.Sstock markets experienced a sharp declineThis downturn was echoed across the Asia-Pacific region, indicating widespread concern among investorsThe updated dot plot released by the Fed suggested that the median federal funds rate could drop to 3.9% by the end of 2025, a figure that is 50 basis points higher than previously anticipated, indicating potential for only two rate cuts in the coming year.

Cheng Shi emphasized that while Powell has consistently underscored the resilience of the U.S

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economy, the new dot plot points towards a more cautious stance by the Fed, particularly in the face of static inflation and a stable labor market.

The markets had anticipated a more dovish tone from the Fed, leading to a sense of shock when the actual message conveyed was far more hawkishWith ten voting members forecasting only two rate cuts next year, this sentiment was perceived as a stronger commitment to combating inflation than many had expectedFurthermore, the disparity between expected inflation adjustments and GDP growth revisions raised red flags about the Fed's ongoing concerns regarding inflationary pressures.

Moreover, Powell's recent remarks suggested the Fed has entered a phase characterized by ambiguity and vague forward guidance, which is often an unfavorable signal for the marketsLi Chong, an overseas macro researcher from Citic Securities, underscored that in this unclear signaling environment, optimism typically seen during holiday trading may soon dissipate, leading to increased market volatility.

Zhou Maohua, a macro researcher for the Financial Markets Department at Everbright Bank, remarked that the market’s reaction wasn’t surprising given the Fed's shift to a more cautious interest rate reduction pace, projecting fears that high-rate conditions could pose risks to the economy

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This environment has led to sell-offs in high-value stocks and other assets.

Looking ahead, discussions surrounding the Fed's future interest rate decisions remain central to economic analysts and stakeholdersKristina Hooper noted that while many central banks around the world have signaled victories against inflation through aggressive rate hikes, they face the challenge of slowing growth metrics, including declines in the Eurozone manufacturing sector and rising unemployment rates.

Hooper predicts that in 2025, the economic landscape may be characterized by a tug of war between past rate hikes and the positive effects of forthcoming rate cutsAlthough the latest rate cut was widely expected, Cheng Shi argued that the Fed will maintain a flexible policy approach to respond to potential further changes in economic data.

The dynamics of the labor market and inflation will remain critical variables in the Fed's policymaking process