US Fed Cuts Interest Rates, Sending Markets Downward

Facts

• The US Federal Reserve on Wednesday reduced benchmark rates by 0.25 percentage points to 4.25-4.5%. This was its third straight cut — also its last before Donald Trump returns as president.^[1][2][3]
• Fed Chair Jerome Powell indicated entering a "new phase" involving caution about further cuts, as inflation has persisted. This caused US stocks to drop sharply on Wednesday.^[4][5]
• While the S&P 500 slid 3.03% and the Dow Jones dropped 2.54% — their respective biggest falls since September 2022 — the Nasdaq 100 fell 3.74% even as US Treasury yields rose.^[6][7][8]
• The rate cut also sent the dollar to a two-year high, despite the news that "economic activity has continued to expand at a solid pace" and the unemployment rate "remains low" per the Federal Open Market Committee.^[6][9]
• In November, US inflation rose to 2.7%. The Fed reportedly has projected inflation above its target for Trump's first two years, economic growth being above potential for this first year, and joblessness not rising above 4.3%.^[5][9]

Sources: ^[1]Financial Times, ^[2]The Guardian, ^[3]USA Today, ^[4]Reuters, ^[5]BBC News, ^[6]EuroNews, ^[7]NBC, ^[8]NDTV and ^[9]Al Jazeera.

Narratives

• Pro-establishment narrative, as provided by Bankrate and Reuters. In a nuanced shift in monetary policy, the US Federal Reserve has adopted a more measured approach to rate cuts, acknowledging both progress and persistent challenges in taming inflation. While delivering a quarter-point cut, Powell emphasized the need for caution going forward, particularly given sideways inflation movements and potential inflationary pressures from proposed Trump administration policies. This careful stance reflects the delicate balance between supporting economic growth and preventing inflation from regaining momentum.
• Establishment-critical narrative, as provided by The Hill and Business Standard. Despite delivering a 25-basis-point rate cut, the Federal Reserve's latest move has sparked skepticism in financial markets as shown by "Black Wednesday." With Cleveland Fed President Hammack's dissent and Chair Powell describing the decision as a "close call," markets are essentially calling the Fed's bluff. The puzzling logic of planning rate cuts while projecting higher inflation, combined with Trump's potentially inflationary trade policies, has some economists predicting the Fed may even go for increasing interest rates in 2025, which will roil the markets for some time to come.