Fed Gives a Hawkish Surprise in Final Meeting of 2024 - What's in Store For 2025

At its concluding policy meeting of 2024, the Federal Reserve stunned markets with a clear hawkish stance in its updated economic projections, reflecting the expected path of future interest rates 

Despite delivering a widely anticipated 0.25 per cent rate cut—bringing the federal funds rate to a range of 4.25 per cent–4.50 per cent - the Fed dot plot signalled only two rate cuts in 2025, significantly fewer than the four cuts projected in September. This unexpected revision unsettled markets, causing bond yields to rise and stock prices to tumble. 

Fed’s Rationale: Inflation and Policy Uncertainty Federal Reserve Chair Jerome Powell emphasized two key reasons behind the cautious approach: persistent concerns over inflation and uncertainties surrounding potential tariff policies in the upcoming year. However, Powell reassured that the U.S. economy remains resilient, stating it is "in a really good place." Market fundamentals remain sound, presenting long-term opportunities amid volatility for strategic investors. 

Global Stocks Decline Amid Volatility U.S. stocks faced broad declines in the second half of December, with Small-Cap indices experiencing the steepest losses. However, a rally in the last week of December helped pare some of the weekly declines. 

The Fed’s announcement dominated market sentiment. While the rate cut aligned with expectations, investor confidence faltered as the Fed revised its 2025 core inflation forecast upward to 2.5 per cent from September's 2.2 per cent. Powell's hawkish commentary signalled caution over additional rate cuts, triggering the S&P 500’s second-worst daily drop of the year at nearly 3 per cent. 

European equities mirrored U.S. declines, with the STOXX Europe 600 Index suffering its largest weekly loss in over three months, down 2.76 per cent. Concerns about U.S. trade tariffs targeting the European Union and shifting interest rate expectations further dampened sentiment. Major indices followed suit: Germany’s DAX fell 2.55 per cent, Italy’s FTSE MIB plunged 3.22 per cent, and France’s CAC 40 declined 1.82 per cent. The UK’s FTSE 100 slid 2.60 per cent. 

Eurozone private sector activity remained in contraction, albeit marginally, as the services sector showed signs of stabilization. However, Germany and France, the bloc’s economic powerhouses, saw only slight improvements in their slowdown trajectories. 

In the past fortnight, Japanese stock markets also fell, with the Nikkei 225 Index down 2 per cent and the TOPIX Index declining 1.6 per cent. Banks faced challenges as expectations for faster monetary policy normalization by the Bank of Japan (BoJ) waned. Meanwhile, a weakening yen bolstered export prospects, particularly for automakers, though Japanese authorities intervened verbally to support the currency, which slid to the high-JPY 156 range against the USD. 

Chinese equities retreated as underwhelming data reignited concerns about the economy’s health. The Shanghai Composite Index dropped 0.7 per cent, and the CSI 300 edged down 0.14 per cent. In Hong Kong, the Hang Seng Index lost 1.25 per cent. Despite signs of improvement in youth unemployment, broader economic anxieties persisted. 

Looking Ahead As 2025 approaches, markets must contend with persistent inflation, geopolitical uncertainties, and the ripple effects of evolving monetary policies. Investors should adopt a strategic, long-term perspective, leveraging opportunities within a landscape marked by heightened volatility and transformative economic shifts.