On December 18, the Federal Reserve's Federal Open Market Committee (FOMC) announced a reduction in interest rates by 25 basis points, bringing the target range down to 4.25% to 4.50%. This latest decision aligned with market expectations and marked the third consecutive rate cut since September of this yearThe FOMC indicated a cautious approach moving forward, as inflation risks loom large, suggesting that slowing the pace of policy adjustments next year would be prudent in light of more resilient inflation expectations.

The updated economic projections, along with the so-called “dot plot,” revealed an increase in both inflation and interest rate forecasts for the upcoming two years, reflecting a distinctly hawkish stanceAnalysts have remarked that this adjustment in the Fed's forecast regarding inflation and unemployment indications suggests the FOMC believes that policy in the U.S

will, in fact, spur inflationary pressures throughout the coming year.

Olu Sonola, head of U.Seconomic research at Fitch Ratings, offered his insights, commenting that this recent policy shift resembles more of a pause in hawkish tightening rather than a full pivotHe noted that while the U.Seconomy is showing solid growth and the labor market remains strong, an "inflation storm" appears to be on the horizonThe current Federal Reserve clearly lacks the decisive policy direction observed just three months agoAll involved must brace for potential turbulence in monetary policy projected for 2025.

This decidedly hawkish stance from the FOMC led to a tumultuous reaction in the equity marketsThe Dow Jones Industrial Average plummeted by 1,100 points, marking the first occurrence of ten consecutive daily declines since 1974. Simultaneously, the S&P 500 index fell sharply by 2.95%, resulting in the steepest drop for a Federal Reserve meeting day since 2001. The VIX, often referred to as the “fear index,” skyrocketed by 74%, signaling a significant surge in investor anxiety.

Historically, since 1990, the Fed has navigated through eight distinct cycles of rate cuts

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Among those, the S&P 500 index experienced an uptick within one year following the conclusion of seven of those cycles.

During this policy meeting, Beth MHammack, from the Cleveland Fed, stood as the sole dissenter, advocating instead for the rates to remain untouched at this timeThis marked a significant moment although the broader committee leaned towards the reductions.

The FOMC reiterated its commitment to decrease the holdings of U.STreasuries, agency debt, and agency mortgage-backed securities, signaling that their strategy for quantitative tightening remains unchangedChanges to the wording in the December statement were minimal, merely refining phrases around the consideration for potential future adjustments to the federal funds rate target range.

Unexpectedly, during the subsequent press briefing, Fed Chair Jerome Powell indicated that the threshold for any future rate cuts may be substantially higher

He pointed out that the policy rate has already been reduced by a full percentage point from its peak, illustrating that the restrictive stance of policy has markedly lessenedPowell emphasized that the decision for the December rate cut came with challenges, yet he affirmed it was the correct choiceFuture decisions regarding rate cuts in 2025 will be contingent upon incoming data rather than merely existing forecasts, with a preference towards waiting for signs of inflation improvement before contemplating further cuts.

The updated economic projections and dot plot indicated that 10 of the 19 voting FOMC members believe the target range for the federal funds rate will decline to between 3.75% and 4% by the end of 2025. Calculating based on 25 basis point reductions, this suggests that the majority foresee only two rate cuts next year, a significant reduction from earlier predictions of four.

The opinions of the FOMC members varied, with one member insisting that no cuts should occur next year, while three members suggested a single cut should be undertaken

Meanwhile, ten members advocated for two cuts, and three believed there should be three adjustmentsNotably, one member thought that four cuts would be appropriate, and another felt that five would be justifiable.

Returning to the broader implications, the chaotic messaging from the hawkish stance of the FOMC has reverberated throughout stock markets, which reacted strongly.

On December 18, the Dow Jones witnessed a staggering drop of 1,100 points, marking a significant historical moment with ten consecutive days of losses, a first since 1974. The S&P 500 index also experienced a sharp downturn, dropping by 2.95%, reflecting its most significant loss for a Federal Reserve meeting day since 2001, while the VIX soared to a four-month high, manifesting heightened fear among investorsSimilarly, the U.Sdollar index experienced a notable increase of 1.22%, surpassing the 108 threshold and reaching a new two-year apex.

Since the early 1990s and leading up to this round of rate cuts, the Federal Reserve has implemented eight distinct cycles of rate reductions

Throughout these cycles, the S&P 500 index has generally increased during the year following the conclusion of most rate cut phases, surging as high as 46% in some cases, with the notable exception following the burst of the dot-com bubble, during which it fell approximately 20% within the same timeframe.

Commenting on the Fed's recent hawkish tone, the UBS Wealth Management Investment Director's Office noted that they believe the Fed will continue to rely on data, emphasizing that future economic indicators will play a vital role in shaping their next movesThe Fed’s preferred measure of inflation, the PCE price index, is set to release figures soon, with expectations suggesting overall inflation will further cool in the coming monthsJob data will remain a key consideration as the Federal Reserve continues to gauge the health of the labor market.

In his press conference, Powell highlighted ongoing discussions within the Fed regarding how tariffs impact inflation

He explained that while extensive research has been conducted, definitive conclusions regarding the effects of tariffs remain premature, particularly as it pertains to targeted nations, magnitude, and durationHe alluded to the analyses from 2018 as still applicable, as multiple elements influence how tariffs may affect consumer prices.

Again, Fitch's Olu Sonola remarked that the Federal Reserve is essentially acknowledging that government policies moving into 2025 could very well lead to higher inflation ratesThe recent policy alteration appears more as a hawkish pause than a full policy shiftDespite robust economic growth and a healthy labor market, the gathering storm clouds of inflation necessitate that stakeholders prepare for adjustment volatility in monetary policy slated for 2025.

Goldman Sachs projected that current tariff measures might elevate core inflation rates by 0.3 percentage points next year