The decision by the U.S. Federal Reserve to cut interest rates for the third consecutive time has failed to soothe financial market sentiment. The 0.25 percentage point reduction, bringing the rate range down to 4.25%-4.5%, was anticipated by some investors, but it triggered a sharp reaction in the stock and bond markets. This response is accompanied by growing uncertainty over future monetary policy amid persistent inflationary pressures and potential actions from the Trump administration.
The Federal Open Market Committee (FOMC) was not unanimous in its decision. Beth Hammack, President of the Cleveland Fed, voted against the rate cut, advocating for rates to remain unchanged. Her stance reflects concerns over whether further monetary easing is justified. Meanwhile, Fed Chair Jerome Powell emphasized that previous actions have reduced the restrictiveness of policy, allowing for more cautious decisions going forward. He noted that any future cuts would depend on progress in controlling inflation.
In its updated economic projections, the Fed reduced expectations for rate cuts in 2025. Instead of four cuts, only two are now anticipated, which could bring rates down to a range of 3.75%-4%. This adjustment stems from higher inflation expectations — the forecasted inflation for 2024 has increased to 2.5% from the previous 2.1%. Although this figure approaches the Fed’s 2% target, it remains above the desired level. Simultaneously, the labor market, with unemployment at 4.2% and rising wages, indicates persistent cost pressures. Nevertheless, the economic growth outlook for 2025 was raised to 2.1%, suggesting a relatively healthy economy.
Market Reaction
Financial markets reacted sharply to the Fed’s decision. The Dow Jones index fell by 2.6%, the S&P 500 dropped by 2.9%, and the tech-heavy Nasdaq Composite plummeted by 3.6%. Similar trends were observed in the bond market, with yields on two-year Treasury notes rising to 4.33%, 10-year yields to 4.51%, and 30-year yields to 4.68%.
Adding to market uncertainty are potential trade policy actions from the Trump administration. The introduction of new tariffs could sustain inflation by increasing import costs and impacting the labor market. While the Fed monitors the potential consequences of such policies, the lack of specifics prevents them from being included in official forecasts.
Reverse Repo Changes
In parallel, the Fed announced changes to its reverse repo mechanism to maintain liquidity and stability in the money market. The introduced tools are designed to support banks and other market participants in managing short-term liquidity.
The current economic context presents increasing challenges for the Fed. Inflation remains stubbornly high, while geopolitical uncertainty, including potential trade wars, limits the Fed’s flexibility in monetary policy.
Author: Krzysztof Kamiński, Oanda TMS Brokers
Source: CEO.com.pl
