On December 18th, during the latest FOMC meeting, the Federal Reserve announced a 25 basis point reduction in its target range, bringing it to 4.25% - 4.50%. This decision reflects the Federal Reserve's response to signs of economic slowing, particularly with slowing labour market activity and weaker housing conditions, while aiming to ease inflationary pressures that remain above the long-term target.

In the third quarter, GDP grew at an annualized rate of 2.9%, driven by strong consumer spending and increased business investment. The labour market has shown signs of slowing, with the unemployment rate increasing to 4.2% in November from 4.1% the previous month. Higher borrowing costs continue to weigh on housing sector activity, contributing to weaker conditions in this area.

In November, the Consumer Price Index (CPI) rose by 0.3% month-over-month, keeping the annual inflation rate at 3.2%. Core CPI, excluding food and energy, increased by 0.4% month-over-month, with the year-over-year rate holding at 3.5%. Rising costs in services, particularly healthcare and transportation, remain significant contributors to inflationary pressures.

Following the Federal Reserve’s decision, the dollar strengthened significantly, reaching a two-year high against major currencies. This reflects investor expectations of a slower pace of rate cuts in the coming year, as indicated by policymakers' updated projections showing only two rate cuts in 2025, compared to previous expectations of three cuts indicated in prior market analyses. This hawkish shift in policy outlook has recalibrated market expectations.

The U.S. equity markets reacted sharply to today’s announcement, with the S&P 500 dropping nearly 3% as investors responded to the Federal Reserve's hawkish outlook and reduced expectations for rate cuts in 2025. This led to declines in high-growth technology stocks, which are particularly sensitive to interest rate changes. Major companies such as Tesla, Meta, and Amazon saw losses of 8.3%, 3.6%, and 4.6%, respectively, reflecting heightened investor caution. In the bond market, on the other hand, U.S. Treasury yields climbed, with the two-year yield rising to 4.35%.

The World Interest Rate Probability (WIRP) indicator shows a 40.1% chance that the next rate cut will be announced at the FOMC meeting in March. The second cut could occur in June, currently carrying a 27.2% probability. Market participants predict less than a 20% chance of rate cuts during the remaining FOMC meetings in 2025. These expectations reflect a measured outlook, consistent with the Federal Reserve’s cautious strategy of gradual adjustments to align with evolving economic conditions.

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