In the early hours of December 19, Beijing time, the United States Federal Reserve delivered its final interest rate decision of the year, opting to lower the target federal funds rate range by 25 basis points to 4.25%-4.50%. This marks the third consecutive reduction, aligning with market expectationsSo far, the cumulative decrease in this round of rate cuts has reached an impressive 100 basis points.

The updated dot plot revealed that Federal Reserve officials project a cumulative rate reduction of 50 basis points by 2025, which corresponds to two expected cutsIn contrast, the prediction from September suggested four rate reductionsDuring a press conference following the announcement, Chairman Jerome Powell emphasized that the current policy stance has significantly eased, suggesting that the Fed's approach to any future rate adjustments could be more measured and cautiousThis implies the Fed may be on the verge of slowing down its pace of rate cuts.

The reaction of the stock market was stark, with all three major U.S

indices experiencing substantial declines under the pressure of a "hawkish" stanceAccording to data from Choice, at the close of trading on December 18, the Nasdaq index fell by 3.56%, the S&P 500 by 2.95%, and the Dow Jones Industrial Average plunged more than a thousand points, declining 2.58%. This marked the Dow's tenth consecutive day of losses, the longest losing streak since October 1974.

On December 19th, the Federal Open Market Committee (FOMC) voted 11-1 in favor of the rate decision, with Beth Harmack from the Cleveland Fed opposing, advocating for maintaining the ratesThis dissent was noteworthy as it was the second opposition vote since the Fed began its rate cut cycle in SeptemberIn the statement accompanying the decision, the Fed indicated that it would carefully evaluate the latest data, evolving outlook, and risk balance when considering future adjustments to the federal funds rate

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The addition of the terms "magnitude" and "timing" in the latest statement hints at a more cautious approach moving forward, signifying a potential slowdown in the rate-cutting process.

Moreover, the dot plot showed a notable decrease in the Fed's expectations regarding the number of cuts anticipated for the upcoming yearOut of 19 officials, ten believe the collective rate should decline by 50 basis points by 2025, implying only two cuts of 25 basis points each, compared to the four predicted previously in SeptemberFurthermore, the economic projections from the FOMC now indicate median expected values for the federal funds rate of 3.9%, 3.4%, and 3.0% for the years 2025, 2026, and the long term, respectively, which contrasts with September's predictions of 3.4%, 2.9%, and 2.9%.

Additionally, the Fed has raised its inflation forecastsThe median projections for core Personal Consumption Expenditures (PCE) inflation for the years 2024 to 2026 are now set at 2.8%, 2.5%, and 2.2%, an increase from September's expectations of 2.6%, 2.2%, and 2.0%.

Speaking at the press conference shortly after the announcement, Powell elaborated on the Fed's outlook concerning their dual mandate of controlling inflation and promoting employment

He noted that the risks they face are broadly balanced, and with the tight labor market conditions easing, significant progress has been made in controlling inflationPowell stated, "With today’s further rate cut, the Fed has lowered its policy rate by 100 basis points from its peakThe restrictive nature of our policy stance has clearly diminished, indicating that we can be more cautious when considering any further adjustments to the policy rate." This cautious phrasing suggests that the Fed is either at or very close to slowing down its rate-cutting regime.

In discussing the long-term economic outlook, Powell expressed optimism, stating that the economy had "avoided a recession," and highlighted the strong overall performance of the U.Seconomy, which continues to expand at a robust paceNevertheless, he acknowledged that inflation risks and uncertainties remain elevated, with it potentially taking another year or two to achieve the 2% inflation target

He emphasized that maintaining a restrictive policy stance is crucial for reaching that target.

Regarding future rate-cutting decisions, Powell conveyed that the Fed is at a new stage of its rate adjustment processHe reiterated that they are still in a "continuing rate cut" path but underscored the necessity of monitoring inflation for further movementsShould the economy maintain its strength without making progress toward the 2% target, the Fed may very well slow its pace of policy adjustmentsNotably, Powell stated that an interest rate hike next year seems unlikely.

In light of these hawkish signals, the market has substantially reduced its expectations regarding further rate cuts from the FedAccording to the CME Group's FedWatch Tool, the market presently estimates that there is a greater than 90% probability that the Fed will hold rates steady when they meet in January.

Additionally, the minutes from the Fed's November meeting indicated that some policymakers were open to considering "technical adjustments" to the overnight reverse repurchase agreement rates, aligning them with the lower bound of the federal funds rate target range

This change was confirmed in the latest decision, with Powell clarifying that these technical adjustments would not alter the stance of monetary policy.

In the aftermath of the interest rate decision, all three major U.Sstock indices experienced sharp declinesAfter the announcement, a rapid "flash crash" occurred, with the drop in stock prices intensifying during Powell's remarksBy the closing bell, the Dow had plummeted by over a thousand points, marking a 2.58% drop and the tenth consecutive day of losses—representing the longest losing streak since October 1974. The Nasdaq closed down 716.37 points, or 3.56%, at 19,392.69, while the S&P 500 fell by 178.45 points, or 2.95%, reaching 5,872.16.

The declines were widespread, with all major sector ETFs in negative territoryRegional bank ETFs declined by 5.19%, and the banking sector ETF fell by 5.02%. Consumer discretionary ETFs saw a downturn exceeding 4.5%, alongside a roughly 4.1% decline in internet stock indices

Technology sector ETFs, semiconductor ETFs, and global technology stock indices similarly dropped by at least 3.1%, while consumer staples and healthcare ETFs fell by more than 1.3%.

Most major tech stocks were also down, with Tesla's stock dropping by 8.28%, Amazon down by 4.6%, Microsoft, Meta, and Alphabet (Google's parent company) each saw declines of over 3%, while Apple and Nvidia lost 2.14% and 1.14%, respectively.

In the bond markets, the yield on the U.S10-year Treasury note rose significantly, surpassing 4.5%. The U.Sdollar index climbed above 108, marking a fresh high not seen since November 2022, while gaining over 1% in a single dayIn contrast, non-U.Scurrencies collectively weakened, with the offshore yuan falling below 7.32 against the dollar, marking a new low since November 2023; the British pound experienced a nearly 1% drop against the dollar, now standing at 1.2582; and the euro recorded a loss exceeding 1.1%, currently at a rate of 1.0367.