Speculation at the beginning of the year about the Federal Reserve cutting interest rates

At the beginning of 2025, the direction of the Federal Reserve's monetary policy has become a focus of attention in global financial markets, especially whether it will further cut interest rates.

From the perspective of supporting interest rate cuts, in terms of inflation, the US Consumer Price Index (CPI) rose 2.9% year-on-year in December 2024, while the core CPI increased by 3.2% year-on-year. Although still higher than the 2% target, the increase has narrowed compared to the previous month, and overall inflation is showing a trend towards the target. The Chicago Mercantile Exchange's Federal Reserve observation tool shows that the market generally believes that there is a possibility of two interest rate cuts in 2025. Chicago Fed President Goolsby, as a dovish official with voting rights, also stated that the US economy is in a state of full employment, with steady growth and falling inflation, allowing the Fed to continue gradually cutting interest rates.

What are the factors that hinder interest rate cuts? The fundamentals of the US economy remain resilient, with a healthy balance sheet and cash flow statement for the residential sector, and a low probability of the job market weakening beyond expectations. The new Trump administration's policies are uncertain, and its policies such as imposing tariffs may stimulate inflation, raising concerns about the Federal Reserve's interest rate cuts. At the FOMC meeting in January, Powell also stated that he is "not in a hurry to adjust" his policy stance and released a message to continue suspending interest rate cuts.

Therefore, overall, it is highly likely that the Federal Reserve will maintain interest rates unchanged in the first quarter, and the first rate cut may occur in the second quarter.

Let's take another look at the impact of the Federal Reserve's interest rate cuts on global finance.

The impact on the exchange rate market: The Federal Reserve's interest rate cuts usually lead to a weakening of the US dollar exchange rate. The attractiveness of US dollar assets to international investors has decreased, and funds have flowed to other economies with relatively high interest rates, leading to the depreciation of the US dollar. Currencies such as the euro and pound may appreciate relative to the US dollar, which can lead to exchange rate fluctuations and trade imbalances for countries that are pegged to or dependent on the US dollar for trade.

Impact on bond market: US treasury bond bonds are generally regarded as risk-free assets, and interest rate cuts by the Federal Reserve will lower the yield of US treasury bond bonds, thus leading to a general downward trend in the yield of global bond markets. For institutions and individuals who rely on fixed income investments, a decrease in returns may prompt them to seek higher return investment opportunities, triggering the flow of funds globally.

The impact on the stock market: Interest rate cuts can reduce corporate financing costs, increase corporate profit margins, and generally be positive for mature stock markets in developed countries, which may usher in an upward trend. But for emerging market stock markets, funds may flow back to the United States, putting pressure on local stock markets.

The impact on the commodity market: Due to the weakening of the US dollar and increased market risk aversion, the Federal Reserve's interest rate cut may lead to an increase in the prices of precious metals such as gold. Commodities such as oil are priced in US dollars, and the depreciation of the US dollar often drives their prices up, but it is also influenced by other factors such as supply and demand.

The impact on international capital flows: interest rate cuts lead to a decrease in domestic asset yields in the United States, and international capital may seek other higher return markets, possibly flowing towards emerging markets. This will bring capital inflows to emerging markets and promote economic development, but it may also bring risks such as asset foam. When the Federal Reserve adjusts its policies again, funds may quickly flow back, triggering turbulence in emerging market financial markets.

The impact on international trade: The depreciation of the US dollar will enhance the competitiveness of US goods in the international market, which is beneficial for US exports. However, for export enterprises from other countries, they may face more intense competition, especially those that have competitive relationships with the United States in certain fields.

In summary, whether the Federal Reserve cuts interest rates or not, as well as the pace and magnitude of the rate cuts, will have a broad and profound impact on the global financial markets. Governments, financial institutions, and investors around the world need to closely monitor the policy movements of the Federal Reserve, develop corresponding policies and investment strategies based on their own actual situations, in order to cope with potential risks and opportunities.