In an unexpected twist within the financial sector, the Federal Reserve has once again taken steps that are sending ripples through the marketJust hours ago, on Thursday, December 19th, during the early hours in Beijing, the Fed announced a decision that would alter the course of economic projections: a 25 basis point interest rate cutThis adjustment lowered the target range for the federal funds rate from 4.5% to 4.75% down to a more accommodating 4.25% to 4.5%.

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This move to lower rates was anticipated by market analysts, aligning well with expectationsOver the past year, the Federal Reserve has progressively cut rates—this latest announcement marks the third consecutive reduction in the current easing cycle, culminating in a total cut of 100 basis points for the year

With key economic indicators such as non-farm employment data, unemployment rates, and the Consumer Price Index reflecting a consensus that favored this adjustment, many viewed the December cut as a necessary response to the economic landscape.

However, rather than the anticipated depreciation of the dollar and a rally across global financial assets, the market reacted in a perplexing and contrary mannerFollowing the announcement, U.Sstock markets experienced a significant drop, with all three major indices falling over 2.5%. Specifically, the Dow Jones industrial average has now seen a losing streak that persists for ten consecutive trading days, marking its longest decline since 1974.

At the market's close, the numbers painted a stark picture: the Dow Jones index fell by 2.58% to end at 42,326.87 points; the S&P 500 dropped 2.95% to 5,872.16 points; and the Nasdaq fell 3.56%, closing at 19,392.69 points

• Global Financial Market Volatility
• The Context of Fluctuations in the Money Market
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• Dollar and Emerging Market Currencies
• Current Trends in Dollar Trading

In a surprising uptick, the U.Sdollar index soared by 1.2%, reaching its highest level in two years and bouncing back to the heights experienced in November 2022.

Assessing the position of the dollar index, it appears that the interest rate cuts in 2024 might ultimately come to a fruitless conclusion, especially with the dollar climbing against non-dollar currenciesFor example, the exchange rate of the dollar to the Canadian dollar increased by 0.63%, touching a pivotal threshold of 1.44 for the first time since March 2020. The dollar strengthened against the Japanese yen by 0.08%, while the offshore yuan saw a substantial depreciation, plunging past 7.32, marking a new low for the year.

Meanwhile, international gold prices slumped dramatically, with spot gold experiencing a short-term decline of nearly $60, ultimately closing at $2585.82 per ounce, the lowest price of the trading day

Silver followed suit, with its price dropping over 2% to settle at $29 per ounce, a low not seen in recent monthsThe overall trend was mirrored by other global commodities, which also suffered significant declines, casting a gloomy shadow over the international financial markets.

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So, why did a rate cut by the Federal Reserve lead to a surge in the dollar and a general decline in asset prices? To simplify matters, while there was a cut in December, expectations for cuts in 2025 did not meet market projections, and the Fed appears to be taking a notably hawkish stance.

Firstly, if inflation fails to continually trend towards the 2% target, the Fed could maintain its restrictive policies for a longer periodIn contemplating further adjustments to interest rates, the Federal Reserve has refrained from committing to a predefined course.

Secondly, there is ongoing discussion within the Fed regarding how tariffs may be influencing inflation

The recent wording in the Federal Open Market Committee (FOMC) statement regarding adjustments to the "magnitude and timing" of interest rate changes suggests that the Fed may be approaching a period of slowing rate cuts, indicating a new phase in interest rate adjustments.

Thirdly, it could take another one to two years to reach that 2% inflation target, which has significant implications for financial projections.

According to the closely watched "dot plot," the Federal Reserve has indicated that it only plans to lower rates twice in 2025—fewer than the previously predicted four cutsAlarmingly, four Fed officials even expressed expectations that any cuts might amount to just 25 basis points or less.

The sudden reduction in the anticipated easing coupled with the incoming administration's "America First" policies is sowing uncertainty regarding market inflation

The proposed policies on tariffs, fiscal measures, immigration, and tax cuts are poised to trigger a rebound in inflation, directly constricting the space for the Fed's easing cycle, possibly eliminating it altogether.

This anticipation has sent shockwaves through global financial markets, forcing them to respond with a widespread downturn to announce December's rate cuts formallyThis situation is particularly impactful, as evidenced by the significant drop in the renminbi, which plunged to a new low.

The series of high-stakes policies announced in the latter half of the year aimed to emphasize more accommodative monetary policies and a broader scope of liquidity; however, their implementation has not lived up to initial expectationsA crucial factor has been the insufficient magnitude of the rate cuts, which did not provide the necessary breathing room for a full economic recovery.

If the anticipated rate reductions in 2025 turn out to be even more limited, this would continue compressing our own ability to ease rates, thus affecting our real estate market, stock market, and overall economic recovery.

The stock market, in particular, is likely to experience the most immediate impacts from these changes.

Following the global declines last night, pressure mounts for the upcoming opening of the A-shares market.

How do you think the A-shares will perform today?