The heated Federal Reserve meeting has concluded with a 25 basis point rate cut. But what truly ignited the market's enthusiasm was the big move that followed the rate cut—immediate resumption of quantitative easing, injecting $40 billion per month into the market. This unexpected Christmas gift instantly lifted market sentiment, but it also concealed several thought-provoking signals. Let's discuss
Hawkish rate cut confirmed! The largest divergence in five years has surfaced. This rate cut reduces the federal funds rate target range to 3.5%-3.75%, fully aligning with market expectations, but the underlying divergence has reached its highest since 2019. Among the 12 voting members, 3 explicitly opposed the rate cut, indicating that concerns about inflation’s resurgence within the Federal Reserve have never dissipated.
A more hawkish signal is hidden in the dot plot: Officials predict that there will only be one interest rate cut in 2026, and nearly half of the officials openly state that this rate cut is unnecessary, with most expecting interest rates to remain at current levels next year. This is in stark contrast to the market's previous expectation of two rate cuts next year, with a tough attitude evident.
Powell repeatedly emphasized at the press conference that this is merely a preventive interest rate cut, with the core aim being to guard against an unexpected downturn in the job market, especially with the unemployment rate among college graduates aged 20 to 24 soaring, which has become a risk point that cannot be ignored. However, on the other side, core inflation stubbornly remains at a high level of 2.8%, and with the continued disturbances from tariff policies, the road to returning inflation to the 2% target remains long and challenging.
A surprising Christmas gift! The $40 billion monthly expansion plan has landed early. Compared to the conventional interest rate cut, the sudden announcement of the expansion plan by the Federal Reserve is the real surprise bomb. The meeting announced the immediate launch of the reserve management bond purchase program, with approximately $40 billion in short-term Treasury bonds to be purchased each month in the first round, and ongoing advancement. This means the Federal Reserve is restarting the expansion plan mode after more than two years. It’s important to know that previous quantitative tightening has shrunk the Federal Reserve's balance sheet by over $2 trillion, with bank reserves nearing warning lines and frequent fluctuations in the repurchase market. The year-end liquidity crunch has already made the market anxious, and this timely rain can be seen as a tailor-made Christmas gift.
Despite Powell's tough talk, insisting that this is merely a technical operation with no relation to monetary policy, the simultaneous release of the expansion plan at the interest rate cut juncture makes it hard not to speculate whether the Federal Reserve's policy has quietly shifted.
On one side is the preventive interest rate cut to guard against risks, and on the other side is the technical expansion plan to stabilize liquidity; the Federal Reserve's combination punches are executed flawlessly. For the cryptocurrency market, liquidity easing expectations have always been a catalyst for price increases. Do you think this Christmas gift can ignite the year-end rally? You might want to check out the Elon Musk concept puppy [P.U.P.P.I.E.S]!
