The Federal Reserve concluded its final policy meeting of 2024 on December 18, delivering a 25 basis point rate cut, bringing the federal funds rate to a target range of 4.25% to 4.5%. This marks the Fed’s third rate cut this year as it continues balancing the need to control inflation with sustaining economic growth.

Economic Context and Rationale

The U.S. economy remains resilient, underpinned by solid growth and a robust labour market. However, inflation remains above the Federal Reserve’s 2% target, coming in at 2.7% year-over-year as of November. The Federal Open Market Committee (FOMC) acknowledged that while labour market conditions have eased slightly and unemployment has edged higher, it remains at historically low levels.

Fed Chair Jerome Powell stated that the current policy stance is “less restrictive” and future rate adjustments will depend on clear evidence of sustained progress in reducing inflation. He emphasised the Fed’s commitment to a cautious approach, signalling that monetary policy decisions will remain data-driven.

Impacts on the USD and US Stock Market

The announcement had a pronounced impact on the USD and US stock market. The U.S. dollar strengthened significantly, reaching a two-year high as traders anticipated a more hawkish monetary policy stance in 2025. This rise in the USD reflects market expectations that the Fed may keep rates elevated for a longer period, even as it gradually eases its policy stance.

Conversely, U.S. stock markets experienced sharp declines. The Dow Jones Industrial Average fell over 1,100 points, its 10th consecutive day of losses, while the S&P 500 and Nasdaq Composite dropped 3% and 3.6%, respectively. Investors responded negatively to the Fed’s indication of a slower pace of rate cuts in 2025, reflecting concerns over prolonged tightening of financial conditions.

Projections for 2025

The Fed’s projections for 2025 suggest a more cautious pace of monetary easing. It now anticipates two rate cuts next year, totalling 50 basis points, down from the previously projected four cuts. This revision underscores the Fed’s focus on containing inflation, which is expected to remain elevated at 2.5%, up from an earlier forecast of 2.1%.

Economic growth is projected to slow modestly, with the unemployment rate likely to tick up slightly. These projections indicate the Fed’s intent to maintain a delicate balance between managing inflationary pressures and supporting economic stability.

Implications for Consumers and Investors

For consumers, the latest rate cut may provide some relief in borrowing costs, particularly for loans, mortgages, and credit cards. However, the Fed’s cautious stance suggests that rates will remain relatively high, potentially limiting the full benefits of these reductions.

Investors should brace for continued market volatility as the Fed navigates a challenging economic landscape. The central bank’s deliberate approach to rate cuts signals a commitment to price stability, which could create headwinds for equity markets but may offer opportunities for fixed-income investments as Treasury yields adjust.

Conclusion

The Federal Reserve’s December meeting reflects its ongoing efforts to steer the U.S. economy through a complex environment of persistent inflation and economic growth challenges. The rate cut, coupled with a conservative outlook for 2025, highlights the Fed’s data-driven approach to balancing its dual mandate. As markets digest the implications of the Fed’s policy stance, both the USD and US financial markets are expected to remain highly reactive to evolving economic conditions.

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