The Federal Reserve's interest rate cut is in place! Powell sends two key signals; can the market rebound continue?
On December 11, 2023, Beijing time, the Federal Reserve completed its third interest rate cut of the year as expected, lowering the target range for the federal funds rate by 25 basis points to 3.5%-3.75%, with a total cut of 75 basis points for the year. Powell's statements at the press conference and the meeting's resolution concealed two core qualitative signals: one is a long-term rate cut path that is lower than expected, and the other is short-term liquidity support that exceeds expectations, leading to an immediate market rebound, although concerns remain.
1. Expectations for interest rate cuts in 2026 have significantly cooled, with severe divergence in the dot plot
The latest dot plot shows that Federal Reserve officials have a median expectation of only one rate cut (25 basis points) in 2026, far below previous market expectations, and internal disagreements have reached a recent high: 7 officials advocate for maintaining the interest rate unchanged throughout 2026, while 8 officials support at least two rate cuts. This prediction is consistent with earlier assessments in the Shuqin program, implying that sustained rate cuts are highly unlikely in 2026, primarily because the Federal Reserve has raised its GDP growth forecast for 2026 (from 1.8% to 2.3%), while inflation is expected to fall to 2.4% but still above the 2% target, and there has been no significant deterioration in the labor market, lacking the economic foundation for rapid rate cuts. Additionally, the meeting statement adjusted its wording to "consider further adjustments in terms of magnitude and timing," indicating that the threshold for future rate cuts has significantly increased.
2. $40 billion short-term bond purchases are "precise easing," not quantitative easing
In addition to the negative news, the Federal Reserve has thrown out a liquidity "sweet date": starting from December 12, it will launch a short-term Treasury purchase plan with a scale of about $40 billion, aimed at maintaining ample bank reserves and alleviating pressure in the overnight financing market. Powell explicitly emphasized that this move is not quantitative easing (QE) — unlike long-term bond purchases during the crisis to stimulate the economy, this time only short-term varieties are being purchased, and the pace will gradually slow, with completion and cessation expected before April next year.
It is noteworthy that the current market rebound mainly relies on short-term liquidity easing, but the limited room for rate cuts in 2026 means that the positive news lacks sustained support, and attention should be paid to the risk of a correction after "good news is fully priced in". It is recommended to closely monitor inflation data and changes in the labor market.
