How the Fed's latest rate decisions could reshape the 2025 economic landscape

FOMC meeting round-up

The Federal Reserve (Fed) delivered a 25 basis point (bp) rate cut overnight to the range of 4.25% to 4.5% as widely expected. While there are already some expectations for the Fed to come in more cautious on the rate outlook compared to their November meeting, the totality of the economic projections and the press conference has called for a more hawkish recalibration in rate expectations.

Shifts in market expectations

Markets were previously eyeing three 25 bp cuts in 2025, but the updated dot plot showed policymakers leaning toward just two cuts in 2025 and two more in 2026. This was justified by a significant upward revision in inflation forecasts (2.5% for 2025 from 2.1% prior), alongside stronger growth (2.1% in 2025 real gross domestic product (GDP) from 2.0% prior).

Reactions to Powell's stance

Hopes that these numbers would be counterbalanced by some tints of dovishness in terms of data-dependency from Fed Chair Jerome Powell were disappointed as well. There seems to be little reeling-in from the Fed Chair, with comments of "more cautious" on cuts ahead, labelling it as a "new phase", the recent cut being a "closer call", and him seeing slower progress on inflation.

Fed Chair Jerome Powell

Takeaways from the FOMC's tone

The more hawkish tone from the Federal Open Market Committee (FOMC) meeting seems to have triggered some "sell-the-news" across Wall Street, which then cascaded into heavy profit-taking, given the stellar run-up we’ve had this year. While there are expectations that the Fed will turn more cautious at the recent meeting, the pronounced market decline may not align with the actual level of hawkishness, hinting at a potential move to flush out short-term speculators.

Impact of Trump's policies on future rates

The future trajectory of rate cuts may also hinge on the policies of President-elect Donald Trump, which remain unclear at this stage. His initial rhetoric on tariffs does sound aggressive, but the extent to which these measures will be implemented is uncertain. As such, there is the possibility that the Fed might initially lean toward a shallower rate path, reserving the option to adjust course as more policy clarity emerges.

Outlook after the FOMC meeting

With the FOMC meeting behind us now, we may expect some calm to return (provided the upcoming Bank of Japan (BoJ) meeting does not throw in any more surprises), which may see a drift higher in Wall Street over the final two weeks of the year. But given the lack of further catalysts, pushing to a new record high by year-end also seems like a challenging task as well.

The hawkish tone from the Fed meeting drove a surge in US Treasury yields, with the 10-year yield surpassing 4.5%, propelling the US dollar to its highest level since November 2022. Some cooldowns may be on the horizon, as rate expectations have already adjusted to reflect a more hawkish Fed path, potentially prompting some profit-taking in the absence of strong new catalysts.

US dollar technical risks

Technical risks, such as the possibility of a lower high on the daily relative strength index (RSI), warrant consideration. However, the broader upward trend is likely to persist until there is greater clarity on President-elect Trump's policy agenda. Any cool-off could still come short-lived for now, while buyers may eye for a retest of its 109 level of resistance over the longer term.

Gold prices dipping below support confluence

A stronger US dollar and higher bond yields have seen gold prices reacting to the downside overnight, putting the key support confluence at the $2610 level at risk of breaking down. This level represents both a critical trendline support and the 100-day moving average (MA). Adding to the bearish signals, the daily moving average convergence/divergence (MACD) has turned lower, failing to cross into positive territory, while prices have slipped below the daily Ichimoku Cloud support for the first time since March 2024. Should the downside persist, sellers may target the November 2024 low at $2534 as the next key level.

Gold daily chart

Nikkei 225 back to retest lower trendline of ascending triangle

Asian markets extended Wall Street's broader sell-off, weighed down by a stronger US dollar and rising bond yields. The Nikkei 225 has retreated to retest the lower trendline of an ascending triangle pattern, aligning with its daily Ichimoku Cloud support. So far, buyers have defended the 38,442 level, keeping the higher-lows formation intact. Sustaining this structure could signal a continuation of the upward trend, with the 40,220 level emerging as the next key resistance to watch.

Looking ahead, the BoJ meeting will be a crucial event. Market participants are hoping for minimal surprises, with expectations for the central bank to maintain current rates while signalling a gradual path toward rate hikes in 2025.

Nikkei 225 daily chart