The Federal Reserve has once again played a game of expectation management; the rate cut was granted, but the underlying drama is much more complex than what appears on the surface.
Hey, guys, you all saw the Federal Reserve's decision early this morning, right? A 25 basis point rate cut, meeting market expectations, but there are plenty of devils hidden in the details. As someone who has been navigating the crypto market for many years, let me break down the real highlights of this meeting for you.
On the surface, it seems positive, but upon closer inspection, this fine wine is heavily watered down.
1 A clear rate cut, but hidden currents are surging.
The Federal Reserve announced a 25 basis point rate cut early this morning, lowering the target range for the federal funds rate to between 3.50% and 3.75%. This is their sixth rate cut since starting the easing cycle in September 2024, and the third consecutive 25 basis point cut this year.
It seems to be good news, right? But to be honest, this has already been largely digested by the market. The real story lies in the details.
First of all, the Federal Reserve is in complete turmoil internally. This meeting had three dissenting votes, the most since 2019. Board member Moore advocated for a 50 basis point cut, while the other two regional Fed presidents insisted on holding steady.
On one hand, there is concern that inflation won't go down, and on the other, fear that the job market can't hold up.
Powell himself also said a blunt truth: 'This is a rare situation where our dual objectives are in conflict.' This sentence will definitely be written into textbooks in the future.
2 Buying bonds and flooding the market, and the market is smiling.
The biggest surprise of this meeting is not the rate cut, but the Federal Reserve's announcement to purchase about $40 billion in short-term government bonds each month.
Even though the Federal Reserve insists this is not quantitative easing (QE), the market simply does not care about that label. Money is honest; when liquidity comes, asset prices naturally rise.
History has repeatedly proven that what is called 'non-QE' often ends up being real QE. After the news broke, U.S. stocks surged, gold stabilized above $3700, and Bitcoin soared.
The reason the Federal Reserve is doing this is simple— the economy can’t hold up. The latest data shows that the U.S. job market is clearly cooling, with a surprising loss of 32,000 private sector jobs in November, the largest decline in two and a half years. The unemployment rate also rose from 4.1% in June to 4.4% in September.
In simple terms, the Federal Reserve is stepping on the brakes while accelerating; behind this split operation is that they themselves are uncertain about what to do next.
3 The dot plot reveals that the future rate cut space is compressed.
What disappointed the market even more were the signals revealed by the dot plot. The median predicted by Federal Reserve officials shows that there may only be one more rate cut by 2026.
This is far from the market's previous expectation of at least two rate cuts. Powell also stated at the press conference that the interest rate policy is in a 'good position' and can wait to see how the economy develops. This sounds neither hawkish nor dovish, but in reality, it hints: don't expect continuous rate cuts ahead.
This means that the future rate cut space for the Federal Reserve is actually quite limited. In industry terms, there aren't many bullets left.
Currently, interest rates are in the range of 3.5% to 3.75%. According to the dot plot's predictions, they may eventually stop at around 3%. With inflation still above the 2% target, the Federal Reserve indeed does not dare to let loose too much.
4 The independence of the Federal Reserve is being tested under political pressure.
Another background noise that cannot be ignored in this meeting is political pressure. Trump immediately jumped out after the rate cut to say 'the extent is too small; it could have been larger.' This guy is not the first to criticize the Federal Reserve.
Even more exaggerated is that after Trump took office again in January, he repeatedly criticized Powell and even threatened to remove him from his position. He also pulled a stunt by inserting White House economic advisor Stephen Moore into the Federal Reserve as a board member.
This guy is receiving two salaries simultaneously from the White House and the Federal Reserve, completely breaking the Federal Reserve's long-standing tradition of 'political neutrality.'
Powell is stepping down in May next year, and the Federal Reserve chair appointed by Trump is likely to be someone more obedient. This means that the independence of the Federal Reserve is undergoing unprecedented scrutiny.
With political factors mixed in, future decisions of the Federal Reserve may become more chaotic. For us market veterans, volatility is opportunity, but this opportunity is not something the average person can seize.
Looking at the market response, U.S. stocks surged and then retreated, while gold remained strong after some fluctuations. The market is voting with its feet; liquidity expectations are more exciting than the rate cut itself.
The game between Biden and Trump continues, and it is becoming increasingly difficult for Powell's Federal Reserve to maintain its independence amid political pressure. After Powell steps down in May next year, if a chairperson who listens more to the White House comes in, the independence of the Federal Reserve may become merely nominal.
Do you understand? This rate cut is not a victory for a strong economy, but a proactive response to future worries. The Federal Reserve is not celebrating a victory; it is preparing for a possible economic slowdown.
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