The Fed cuts interest rates, and Powell's unexpected hawkish stance raises concerns. What will the market do?

Shaw, Jinse Finance

On October 30th, the Federal Reserve lowered its benchmark interest rate by 25 basis points to 3.75%-4.00%, in line with market expectations.

However, the FOMC statement revealed a rare situation of "both hawkish and dovish" opinions in this rate decision. Subsequently, Powell unexpectedly made a hawkish statement at the press conference, lowering expectations for continued rate cuts in December and triggering market concerns. Following the Fed's rate decision, major global markets reacted strongly, with US stocks, bonds, gold, and cryptocurrencies experiencing sharp intraday declines, while the US dollar strengthened.

The Fed's October rate cut came as expected, but why can't internal divisions be eased? What are the reasons for Powell's unexpectedly hawkish statement? How should it be interpreted? And what will the market trend be next?

I. October Rate Cut Arrives as Expected, but Whether December Will See Continued Rate Cuts Remains in Doubt

Early this morning, the Federal Reserve announced its October interest rate decision, lowering the benchmark interest rate by 25 basis points to 3.75%-4.00%, marking the second consecutive rate cut at its meeting and meeting, in line with market expectations. This is also the fifth rate cut since September 2024. However, the subsequent FOMC statement and Powell's series of remarks at the press conference lowered expectations for a continued rate cut by the Fed in December, triggering market concerns. According to the latest CME FedWatch, the probability of a 25 basis point rate cut by the Fed in December is 67.8%, while the probability of maintaining the rate unchanged is 32.2%.

The probability of the Federal Reserve cutting interest rates by a cumulative 25 basis points by January is 56%, the probability of keeping rates unchanged is 21.5%, and the probability of a cumulative 50 basis point cut is 22.5%. Following the announcement of this interest rate decision, major global asset markets reacted strongly. US stocks, US Treasuries, gold, and cryptocurrencies all experienced sharp intraday declines, with Bitcoin and Ethereum both falling by more than 3% at one point. US Treasury yields surged across the board, with both 2-year and 10-year yields rising by more than 10 basis points, and the US dollar briefly returned above the 99 mark. Nvidia hit a new high, closing up nearly 3%, with its market capitalization exceeding $5 trillion. Ultimately, supported by Nvidia, the Nasdaq closed up 0.55%, the S&P 500 closed flat, and the Dow Jones Industrial Average fell 0.16%. The market had already anticipated the Fed's October rate cut decision and expected it to stimulate the global economy and major asset markets. However, with the policy explanations in this FOMC statement and Powell's press conference, the market is skeptical about whether the Fed will continue to cut interest rates in December, which has also triggered investor concerns. II. The FOMC statement still reveals internal divisions within the Fed. This FOMC statement announced that the Fed will end its balance sheet reduction on December 1st. After the balance sheet reduction ends on December 1st, the principal from the redemption of mortgage-backed securities will be reinvested in short-term Treasury securities. Starting December 1st, all principal payments on maturing U.S. Treasury securities will be rolled over. The FOMC statement also announced a reduction in the discount rate from 4.25% to 4%, and a reduction in the overnight reverse repo rate from 4% to 3.75%. The statement indicated that current data shows the economy is expanding at a moderate pace, but uncertainty about the economic outlook remains high. Inflation has risen this year and remains high. The Committee is closely monitoring the risks on both sides of its dual mandate and believes that downside risks to employment have increased. The Federal Reserve's FOMC statement revealed a rare "hawkish-dove" situation at this year's interest rate decision. For the second consecutive meeting, Fed Governor Stephen Milan advocated for a more aggressive rate cut, suggesting a 50-basis-point cut instead of the actual 25-basis-point reduction. Meanwhile, Kansas City Fed President Schmid took a hawkish stance, opposing any rate cut and advocating for maintaining the current rate. All other governors voted in favor of the decision. This kind of two-way disagreement last occurred in September 2019, reflecting a significant divergence in the Fed's assessment of the economic outlook. The FOMC statement's clear division within the Fed demonstrates a lack of clear and unified understanding of the economic situation and future policy decisions during the US government shutdown and the absence of substantial economic data.

III. Powell's Unexpectedly Hawkish Remarks Raise Concerns

Federal Reserve Chairman Jerome Powell subsequently explained the interest rate cut decision and the economic situation at a press conference, and answered reporters' questions. Powell stated that **current data indicates that the U.S. economic outlook has not changed significantly and is expanding moderately.** Data before the shutdown showed that the economy may be moving towards a more solid track; the government shutdown will temporarily drag down economic activity. He stated that **inflation levels remain slightly high, and recent inflation expectations have risen somewhat; the Federal Reserve needs to manage the risk of prolonged inflation and has a responsibility to ensure it does not become a persistent problem.** Regarding the impact of tariffs, Powell stated that under a reasonable baseline scenario, the impact of tariffs on inflation will be temporary. Regarding labor and employment, Powell stated that the labor market appears to be gradually cooling; current evidence suggests that layoffs and hiring remain low; and downside risks to employment appear to have increased. He noted that state unemployment claims data are signaling a "business as usual" scenario; the low number of unemployment claims indicates that the labor market is only gradually cooling, not declining rapidly; and that if data shows an improvement in the job market, it will influence policy decisions. Regarding the Fed ending its balance sheet reduction, Powell stated that money market pressures necessitate an immediate adjustment to balance sheet operations; the next phase of the balance sheet reduction will begin in December, and stability will be maintained in the short term. Money market liquidity has tightened over the past three weeks, making further balance sheet reduction less beneficial; bank reserves are only slightly above adequate levels, and the balance sheet decision will allow the market some time to adjust. He stated that there are "clear signs" indicating it's time to stop quantitative tightening; reinvestment strategies will bring the weighted average maturity closer to the outstanding securities stock. Powell offered explanations regarding the Federal Reserve's interest rate decision. He stated that there has been no significant deterioration in any sector of the economy, and overall, the economic situation is excellent. He believes the Fed has taken the right actions so far this year. Powell reiterated that there is no zero-risk policy path, and the risk balance has shifted. The Fed's rate cut is "another step towards a more neutral policy stance"; the risk management logic also applies to today's rate cut, and the October rate cut followed the same risk management logic as the September rate cut. He stated that the Fed cannot address both employment and inflation risks simultaneously with a single tool. Powell also indicated that a December rate cut is "far from" a done deal, suggesting the Fed is uncertain about whether to continue cutting rates in December. The market's expectations for an October rate cut have been exhausted, and it still hopes that the Fed will continue to cut rates in December to stimulate the continued rise of major assets. However, Powell's unexpectedly hawkish remarks have cast a shadow over market confidence. IV. How to Interpret the Fed's Decision Regarding the Fed's decision, Nick Timiraos, a Wall Street Journal reporter and often referred to as the "Fed's mouthpiece," commented on Fed Chairman Powell's remarks, saying, "Powell's press conference indicated that the FOMC as a whole does not agree with the market's high pricing of a December rate cut." Timiraos stated that the October FOMC meeting differed in several ways. The September dot plot revealed divisions within the committee: most favored continuing rate cuts as a risk management tool, but a significant number believed there was no need for further cuts. Typically, data helps reconcile these differences. However, with less high-level data available between FOMC meetings to refine the outlook, members had less reason to change their stance. Omair, an analyst at Inflation Insights, said... Sharif believes the US government shutdown and the lack of relevant official economic data could hinder the Federal Reserve's plan for a third consecutive rate cut in December. If official data reflecting economic activity in October and November is not available at the December 10 meeting, will officials feel comfortable cutting rates again? They may find it difficult to reach a consensus on another rate cut, especially given the internal divisions within the FOMC shown in the September dot plot. Analyst Joseph Richter stated, "The flattening of the yield curve after Powell indicated a December rate cut was not a certainty seems a bit excessive to us." "While the Fed may not cut rates at every meeting (although we believe they will), we think this statement is an attempt to regain control. The market will interpret this as hawkish, but it may not materialize." Vincent Reinhart, chief economist at BNY Mellon Investment Management and former senior advisor to the Federal Reserve, believes that given the data vacuum, "the data must prove that further easing is unreasonable, which is a very high threshold," adding, "It's really difficult for them not to cut rates in December. Continuing is easier than stopping." James Bullard, dean of Purdue University's Graduate School of Business and former president of the Federal Reserve Bank of St. Louis, believes the prospect of a December rate cut is "a bit more nuanced than the market currently thinks." He points out that strong consumer spending and economic growth, coupled with recent inflation setbacks, could be reasons to slow the pace of rate cuts. "You're betting too much on a slowdown in the non-farm payrolls report," Bullard said. He also questions whether policymakers have truly adapted to the new normal of 50,000 new jobs per month being "perfectly acceptable." Furthermore, on Thursday, Trump criticized the Federal Reserve, again targeting Fed Chairman Powell for his slow action on interest rate cuts. In a speech in South Korea, Trump referred to "Jerome 'Too Late' Powell" and stated that he would not allow the Fed to raise rates due to concerns about inflation three years from now. He projected that the US economy would grow by 4% in the first quarter of 2026, far exceeding economists' forecasts. This statement highlights the tension between Trump and the Fed. V. What's Next for the Market? Following the Fed's October interest rate decision, what's next for major asset markets, including cryptocurrencies? The market has offered the following interpretations. 1. Glassnode stated that the market continues to trade near its short-term holding cost price (approximately 11.3). The price is struggling above $10,000, a key battleground between bulls and bears. Failure to regain this level could lead to a further decline towards the active investor's actual price (approximately $88,000). Glassnode states that the current market calm is conditional, but it could become fragile if the Fed's actions deviate from expectations.

2. Strategy founder Michael Saylor, in an interview, released his latest Bitcoin price prediction, predicting a price of $150,000 by the end of the year and a target of $1 million within the next 4 to 8 years.