On Wednesday afternoon local time, the Fed announced a reduction of 25 basis points in the benchmark policy rate, but at the same time hinted that the number of rate cuts in 2025 may be fewer than previously expected. This news has caused market turmoil, with both the US stock and crypto markets plunging together.
According to the Fed's latest quarterly economic forecast, there may only be two rate cuts in 2025, far below the four forecast in September, and also lower than the market's previous expectation of three times. This indicates the Fed's more cautious attitude towards balancing inflation and economic growth. In addition, the Fed has also raised its forecast for 2024 personal consumption expenditure (PCE) and core PCE inflation, from 2.1% and 2.2% in September to 2.5% each.
Fed Chair Powell referred to this change as a "new phase" in monetary policy, stating that after an expected 100 basis points rate cut in 2024, the interest rate level is closer to a neutral stance.
Market reaction: Stock market tumbled, risk aversion rising.
Affected by the signal of the Federal Reserve policy, the three major indexes of the US stock market all fell. As of Wednesday's close, the Dow Jones Industrial Average fell by 2.59%, marking the longest 50-year continuous decline in 10 days; the S&P 500 Index fell by 2.95%; and the Nasdaq Index plunged by 3.56%. The US dollar index soared to a new two-year high, while the Chicago Board Options Exchange Volatility Index (VIX), reflecting market panic, surged by 58% to 25 points, indicating significantly increased uncertainty among investors about future interest rate policies.
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