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US Fed cut interest rate by 25bps but hawkish rate cut guidance spook markets

ICICIdirect Research 20 Dec 2024 DISCLAIMER

FOMC delivered a rate cut of 25bps on expected lines with fed funds rate now stands 4.25%-4.50%.

However, U.S. Fed provided a much more hawkish guidance than expected via its outlook on policy rates provided from the ‘dot-plot’. The ‘dot-plot’ showed that members are looking at fewer rate cuts in 2025 of 50bps as compared with previous guidance of 100bps while resorting to a 50bps cut in 2026. Long-term neutral rate was raised by 10bps to 3% from 2.9%. Fed indicated that Core PCE inflation was expected to move to the 2.8% level in 2024 to 2.5% in 2025. Inflation is expected to only converge to the 2% threshold by 2027 that would require a much more restrictive monetary regime.

Markets reacted negatively with bond yields moving up 20bps in last 2 days post policy announcement to 4.58% from 4.38% while Dow Jones down 3% in last 2 days.

However, the most important point to note is that the next policy meeting is after new president elect Mr. Donald Trump swear in. His policy announcements and guidance may change the outlook completely.

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