On December 19, the Financial Association reported (Editor: Xiaoxiang) that although Wall Street had long anticipated a "hawkish rate cut" from the Federal Reserve this week, perhaps few expected the Fed's stance to be so hawkish, and the impact on the US market to be so severe...

As the Dow Jones plummeted by 1,100 points, it recorded the first "ten consecutive negatives" in half a century (since 1974). Except for the USD, everything in sight yesterday—US stocks, US bonds, Gold, Bitcoin fell sharply. This "indiscriminate" selling the market faced reflects extreme fear of investors regarding the Federal Reserve's decision last night.

In fact, the "fear index" VIX for US stocks surged by 74% in just one day last night, reaching the highest level in four months at 28.32, with a single day increase larger than that witnessed during the Black Monday in August!

From the perspective of index declines, the US stock market indeed faced its worst day since the August "Black Monday" yesterday. The Dow Jones and the S&P 500 Index both recorded their largest single-day percentage losses since August 5. The Dow experienced a decline for the 10th consecutive trading day, marking the longest losing streak since 11 consecutive days in October 1974. The S&P 500 Index saw the largest decline on a Federal Reserve meeting day since 2001.

As of the close, the Dow Jones Industrial Index fell by 1,123.03 points, down 2.58%, to 42,326.87 points; the S&P 500 Index dropped by 178.45 points, down 2.95%, to 5,872.16 points; the Nasdaq Composite Index decreased by 716.37 points, down 3.56%, to 19,392.69 points.

The S&P 500 Index has recorded more declining constituent stocks than rising ones for 13 consecutive days, continuing to extend the second-longest streak in nearly 100 years.

In the bond market, on Wednesday, in addition to the big rise in US bond yields, an interesting phenomenon is that long-term bond yields—the 30-year and 10-year US bond yields—have now both exceeded the Federal Reserve's target upper limit of 4.5%. Meanwhile, the 2-year and 5-year US bond yields are also rising toward this threshold, which is actually a rather intriguing signal for a market still in a rate-cutting cycle—the bond market seems not to believe the Federal Reserve can cut rates much further...

This is evidenced by the fact that the interest rate market's expectation for the Federal Reserve's rate by the end of 2025 is approaching 4%.

The biggest, or perhaps the only, winner in the market on Wednesday seems to be the USD. The Bloomberg Dollar Index has expanded its gain to 4% since Trump's victory.

Currently, the level at which the Bloomberg Dollar Index is situated has actually reached the highest point of the surge following the COVID-19 epidemic in 2020. In the past four years, only during the most intense rate hikes by the Federal Reserve in 2022 has it been higher than now.

Against the backdrop of a soaring USD, the price of Gold has overnight plummeted past the $2,600 mark.

Bitcoin has even performed a dramatic dive, plunging towards the $0.1 million threshold.

So, after reviewing the cross-asset market situation from last night, the question naturally arises: Why were American investors so terrified to engage in "indiscriminate" selling yesterday? What exactly did the Federal Reserve do?

In fact, we mentioned in yesterday's forecast that Wednesday's monetary policy meeting could mark the end of the first phase of the Federal Reserve's rate-cutting cycle. Ultimately, on several of the "hawkish rate cuts" points we mentioned, the Federal Reserve acted even more hawkish than the market expected. In summary, it can be simply condensed into the following five points:

① The dot plot expects only two rate cuts next year.

At this meeting, as expected, the interest rate was announced to be cut by 25 basis points to 4.25%-4.5%. The "dot plot" released by the Federal Reserve indicates that only two more rate cuts are expected by 2025. This is a halving of the planned number of rate cuts compared to the September dot plot, which anticipated four cuts next year. Federal Reserve officials also expect two more cuts in 2026 and one more in 2027.

Compared to the last rate forecast in September, Federal Reserve officials have raised the interest rate expectations for all time periods after this year, with the median expectation for next year's rates increasing to 3.9%. The median expectation for 2026 has risen to 3.4%, an increase of 50 basis points, and the median forecast for 2027 has been raised by 20 basis points to 3.1%.

In yesterday's outlook, we mentioned that if the Federal Reserve's dot plot this week reduces the estimated number of rate cuts for next year down to three, it would actually be roughly in line with expectations. If it further shrinks to two cuts, that would be a more hawkish outcome. Clearly, the hawkish shift in the Federal Reserve's dot plot yesterday exceeded market expectations.

Due to the Federal Reserve's own hawkish turn, the latest expectations in the interest rate market also became more hawkish after the overnight adjustment. The interest rate futures market expects only a 32 basis point cut in 2025 (leaning more towards just one cut), down from the 49 basis points expected right before the Federal Reserve's statement was released.

Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities in New York, stated that the Federal Reserve's downward adjustment of its interest rate outlook for the next two years is a signal indicating that the market will continue to anticipate fewer than two rate cuts, and if the data is strong enough, it may even trend toward not cutting rates at all.

② The statement wording releases a signal to change the pace of rate cuts.

Compared to the Federal Reserve's monetary policy statement last month, a significant change in this month's statement is the addition of terms "magnitude" and "timing" when referring to future interest rate adjustments. This small change in wording has, to some extent, already released a signal to change the pace of rate cuts.

The latest Federal Reserve statement indicates that, "When considering the magnitude and timing of new adjustments to the federal funds rate target range, the (FOMC) committee will carefully assess future data, evolving outlooks, and risk balances."

Nick Timiraos from the 'New Federal Reserve News Agency' indicated that by increasing the 'extent and timing' of their statements regarding potential interest rate adjustments, the Federal Reserve suggests that the pace of rate cuts will slow down.

On the surface, is there one vote against the rate cut, while secretly there are four?

The FOMC statement showed that among the 12 voting members, there was again one vote against the rate cut decision—Cleveland Fed President Harmark supported not cutting rates.

Interestingly, Harmark is actually the only Federal Reserve official mentioned in our previous forecast article other than Powell. As we introduced, Harmark stated earlier this month that the Federal Reserve has reached or is close to the point where it should slow down the pace of rate cuts. She also favorably referred to the two rate cuts in the 1990s, when the Federal Reserve quickly cut rates by a total of 0.75 percentage points and then adopted a wait-and-see approach.

Harmark only took over as the Cleveland Fed President this year. Clearly, at her second Federal Reserve policy meeting since taking office, Harmark cast a dissenting vote, indicating that she still adheres to the long-standing hawkish tone of the Cleveland Fed within the Federal Reserve.

At the same time, it is important to remind investors that while you may think there was only one dissenting vote against the rate cut yesterday, in reality, at least up to four Federal Reserve officials might actually oppose the December rate cut. Just looking at the dot plot shows that although many no longer focus on the 2024 portion, there are still as many as four dots supporting maintaining rates at 4.5%-4.75% by the end of this year.

In other words, there are at least three Federal Reserve officials who do not have voting rights this year opposing the December rate cut. At least one or two among them may gain voting rights next year.

The long-term neutral interest rate estimate has risen to 3%.

In the dot plot, the hidden hawkish "code" is not limited to the above. The dot plot shows that the Federal Reserve's estimate for the long-term neutral interest rate has risen to 3.0%, up from 2.9% in September.

Powell mentioned this topic at the press conference after the meeting. Powell stated that in our summary of economic forecasts, we wrote about the long-term neutral interest rate. This refers to the neutral rate when supply and demand are balanced, the entire economy is in equilibrium, and there are no external shocks. Currently, this is not the situation.

Powell pointed out, "We do not know exactly where the neutral rate is. But as I like to say, we judge it by its effects. What we can be sure of is that we are closer to this neutral point now—about 100 basis points closer than before. There are many estimates of the specific value of the neutral rate, and we know we are closer to the target."

Powell said, "I think we are in a good position right now, but from now on, we are entering a new phase, and we will be more cautious about further rate cuts."

Does the Federal Reserve know that the inflation target has become an illusion?

The latest economic forecast summary released by the Federal Reserve also shows that the Fed has raised its GDP growth expectations for this year and next, lowered unemployment rate expectations for this year and next, and raised inflation expectations for 2024-2026.

Among these, the changes in inflation estimates may be particularly noteworthy. The Federal Reserve now expects that overall and core PCE price indexes will both settle at 2.5% in 2025, significantly raised from the September estimate. Additionally, by 2026, these two sets of forecasts still cannot return to the 2% inflation target.

Jack McIntyre, portfolio manager at Brandywine Global, stated: "Stronger growth expectations and higher inflation expectations—it's no wonder the Fed reduced its forecast for rate cuts in 2025. The outcome of this meeting poses a question: if the market does not anticipate a rate cut today, will the Fed actually cut rates? I doubt it."

Mcintyre pointed out, "The Federal Reserve has entered a new phase of monetary policy - the pause phase. The longer this phase lasts, the more likely the market will believe that the chances of rate hikes and cuts are close. The uncertainty of policy will make the financial markets more turbulent in 2025."

Powell hinted at beginning preparations for Trump's term.

USA President-elect Trump has threatened to implement radical tariff plans upon taking office, and economists generally believe this could lead to a resurgence of inflation in the USA.

Powell revealed that some members of the Federal Open Market Committee (FOMC) have begun to conduct preliminary assessments of the impacts of Trump's policies.

He also specifically mentioned Trump's tariff plans, stating that it is still too early to conclude how they would affect inflation.