Author: Chloe, ChainCatcher

The Federal Reserve's final policy meeting of the year has concluded, with the market expecting a 25 basis point cut to the benchmark interest rate, bringing it to a range of 3.50%-3.75%. This marks the third consecutive rate cut at the current meeting. Since September, the Fed has cumulatively cut rates by 75 basis points. The decision passed with a 9-3 vote, with two members opposing the rate cut and one member supporting a 50 basis point cut.

Meanwhile, the Federal Reserve launched its Treasury bill program to maintain an ample supply of reserves. Reuters reported that this technical round of purchases will begin on December 12, with the first round of Treasury bill purchases amounting to approximately $40 billion.

The Federal Reserve, which had just decided to end its balance sheet reduction in early December, has now quickly shifted to a slight expansion of its balance sheet to address recent pressures in the repurchase market and volatility in the short-term funding market.

Powell ruled out the possibility of raising interest rates, emphasizing that the core mission is to maintain the 2% inflation target.

The policy statement indicated that economic activity was growing moderately, but the labor market was weakening, the unemployment rate was rising, and inflation remained high. To achieve its maximum employment and 2% inflation goals, the Federal Reserve lowered the interest rate range and will decide on future adjustments based on the latest data and risk assessment. The Committee will continue to monitor the labor market, inflation expectations, and domestic and international financial developments. Meanwhile, to ensure sufficient reserves, the Federal Reserve will launch a short-term Treasury purchase program.

At the operational level, the Federal Reserve Board of Governors unanimously agreed to adjust relevant interest rates and directed open market operations, including repurchase reinvestment, to support policy implementation.

At the press conference, Powell stated that the reason for the rate cut was that inflation still faced upward pressure, while the labor market began to weaken, causing the two objectives to pull against each other. He emphasized that there is never a risk-free policy, and that interest rates have now returned to the "broadly neutral range," with the policy stance "quite appropriate," allowing officials to more patiently observe the data before deciding on the next step, rather than pre-setting a direction. He hinted that the downside risks to the labor market were greater than those to inflation, and that inflation above the target was mostly driven by tariffs and was temporary.

Powell ruled out the possibility of raising interest rates and reiterated that the Fed's core mission is to "maintain the 2% inflation target" and "support maximum employment," and that all policy adjustments are based on these principles.

Regarding the economic outlook, Powell pointed out that consumption and business investment were robust, and while the housing market was weak, overall momentum remained strong. The recent brief federal government shutdown impacted the economy this quarter, but is expected to ease somewhat next quarter.

The Federal Reserve's latest Special Economic Projections (SEP) have revised upwards their GDP growth forecasts for this year and next year to 1.7% and 2.3%, respectively. The more optimistic outlook for next year is primarily due to resilient consumer spending, coupled with increased corporate capital expenditure driven by AI-related data center and equipment investments. Excluding the impact of the government shutdown, GDP growth next year is projected to be approximately 2.1%.

The dot plot released after the meeting showed that most policymakers expect another 25 basis point rate cut in 2026, the same as their September forecast. However, Powell emphasized that this was not an indication that the next step would definitely be a rate cut or a halt to rate cuts, but rather a call for understanding that the Fed's next move depends entirely on economic performance, not on predetermined directions.

Internal divisions within the Federal Reserve are widening, with Trump stating that the rate cut was too small.

However, this decision further highlighted the unusual divisions within the Federal Reserve. Nine members, including Chairman Powell and Vice Chairman John Williams, voted in favor of the action; those who opposed it included Stephen Milan (who favored a 50-basis-point rate cut), and Austin Goolsby and Jeffrey Schmid (who favored keeping rates unchanged). This is the first time since 2019 that such a three-against-the-rights situation has occurred.

In addition, not only the two officials mentioned in the statement who did not support the rate cut, but other policymakers also showed hesitation: only four branch Fed offices applied to lower the discount rate (the rate the Fed charges for emergency loans to commercial banks), and six policymakers preferred to keep interest rates in the 3.75%-4% range by the end of next year in their economic forecasts.

Nick Timiraos, a vocal critic of the Federal Reserve, points out that officials are deeply divided on whether inflation or the job market should be a greater concern, which could depend on how Powell proceeds. Powell's term expires next May, leaving him with only three more interest rate meetings.

Following the announcement of the decision, US stocks and bonds rose in tandem, with the Dow Jones Industrial Average gaining nearly 500 points. US Treasury yields and the US dollar index weakened, and the interest rate swap market anticipates another 50 basis point rate cut next year. However, the cryptocurrency market reacted mutedly, with Bitcoin remaining in the $90,000-$91,000 range and Ethereum fluctuating between $3,200 and $3,300. The cryptocurrency fear and greed index fell from 30 to 29.

US President Trump stated that the rate cut was too small and could have been larger.

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