The Federal Reserve has yet again cut interest rates by 0.25%, bringing the federal funds rate to 4.5%. This could be the last time a rate cut will come for a while after the Fed expressed plans to slow the pace moving forward. Historically, today’s rates are not high, but inflation remains above the Fed's 2% target, both in terms of CPI and PCE measures. Updated projections from the Fed’s Summary of Economic Projections (SEP) now forecast a higher terminal rate, with rates expected to only fall to 4.0% by the end of 2025, compared to a previous projection of 3.5%. This trend could put worries on prolonged inflation rather than labour market conditions. Critics argue the Fed’s narrative, which is justifying cuts to protect the labour market, is only a smokescreen covering its real motivations tied to financial pressures such as commercial real estate, banking stability, and government debt. Meanwhile, market expectations of reaccelerating inflation have driven open-market interest rates higher, undermining the Fed's strategy. While the Fed's projections suggest stability in rate cuts, they may pivot soon due to evolving economic or political dynamics.
EQUITY
The Fed's decision had sent stocks into a spiral, dragging all three major indexes down after Chair Powell sees slower cuts in 2025. The news hit particularly hard in growth-sensitive areas, with consumer stocks falling 4.7% and the tech-heavy Nasdaq crashing 3.6%. Small companies took an even bigger hit as the Russell 2000 sank 4.4%, its steepest drop since mid-2022, showing how much these businesses count on lower borrowing costs. Wall Street is now figuring out how pro-tariff President-elect Trump's policies might affect inflation next year.
GOLD
Gold price hit a 4-week low of $2,583 before bouncing back above $2,600 level. The Fed's cautious outlook for just two more cuts in 2025 seems to have a strong effect on the dollar that dragged gold down. Still, the precious metal has had an incredible year, climbing more than 27% and heading for its best performance since 2010. Central banks keep loading up on gold to reduce their reliance on the US dollar, while demand from India hit record levels in November following lower customs fees.
OIL
Oil prices took a slight hit after the Federal Reserve's latest meeting, continuing its sideways trend. The decision could trigger slower economic growth and weaker oil demand, but the way the market reacted, it is unlikely. While oil had a small uptick yesterday when U.S. crude stockpiles dropped by about 900,000 barrels, both major oil benchmarks are now sliding by half a percent. JP Morgan's analysis was gloomy, noting that global oil demand growth is running 200,000 barrels per day behind their earlier forecasts.
CURRENCY
The US dollar rises to a two-year high after the rate cut, contrary to the normal correlation due to lower projection for rate cuts next year. The ripple effects are being felt across Asia, with India's rupee hitting record lows and China's yuan touching its weakest level since September 2023. The euro fell to $1.03433, and the Japanese yen weakened beyond the 155 mark after the Bank of Japan kept its own rates constant. The situation looks especially tough for countries like New Zealand, which just slipped into a recession with its GDP shrinking 1.5% year-on-year.
