Market Analysis by Quasar Elizundia, Expert Research Strategist at Pepperstone
December 19, 2024 –
“The Federal Reserve of the United States has concluded its final monetary policy meeting of 2024 with a widely anticipated decision: a 25-basis-point cut to the benchmark interest rate. However, the central bank’s statement and revised economic projections have injected a note of caution into the markets, signaling a path toward monetary normalization that could be longer than expected.
While the rate cut itself was already priced in, the focus shifted to the Fed’s new economic projections and indications of the future policy trajectory. In this regard, the central bank surprised with a slightly more “hawkish” outlook than anticipated.
The revised projections indicate:
·Higher economic growth: The Fed has raised its GDP growth forecasts for 2024 and 2025, reflecting the resilience of the U.S. economy. However, this strength could also fuel inflationary pressures.
·More persistent inflation: Inflation expectations were also revised upward for 2025 and 2026, indicating that the Fed expects inflation to remain above its 2% target for a longer period. This is a critical data point, suggesting that the fight against inflation is far from over.
·Fewer rate cuts: The “dot plot,” which reflects FOMC members’ interest rate expectations, now shows a less aggressive rate-cut path, with only 2 cuts projected for 2025, aligning the central bank with market expectations ahead of the meeting.
It is worth noting that the Fed has also incorporated the phrase “considering the timing and extent” of future rate cuts. This signals a more data-dependent and cautious approach, consistent with the scaled-back rate-cut outlook.
The market reaction was immediate. The dollar strengthened significantly following the announcement, with the DXY index climbing 0.6%, while U.S. Treasury yields also rose. These movements reflect market surprise at a less accommodative tone than expected.
In summary, the Fed has opted to moderate the pace of rate cuts, sending a clear message: price stability remains a priority. While the U.S. economy demonstrates resilience, the persistence of inflation forces the Fed to act prudently, maintaining a vigilant, data-dependent stance as it progresses toward normalizing its monetary policy.”
Analysis by Quasar Elizundia, Expert Research Strategist – Pepperstone