Stock markets decline as Fed eyes fewer rate cuts ~ EconomyLens.com

London (AFP) – European and Asian stock markets slid Thursday following sharp losses on Wall Street as the Federal Reserve signalled fewer cuts to US interest rates next year. In a busy week for rate decisions, the Fed on Wednesday trimmed borrowing costs by a quarter point but halved the number of similar cuts it expects to carry out in 2025. The dollar initially rallied on the outlook, while the yen was pressured Thursday also after the Bank of Japan kept borrowing costs unchanged.

The Bank of England, as widely expected, held its key interest rate steady due to UK inflation rising again, and it did not commit to when or by how much it will cut rates in 2025. While that decision was widely expected, more BoE policymakers voted for a cut, which sent the pound trimming its gains against the dollar and falling against the euro. The split suggests “members may be more nervous about the state of the economy than originally thought,” said Daniela Sabin Hathorn, senior market analyst at Capital.com.

All three main indices in New York were sent spinning lower on Wednesday — led by a rout of high-flying tech titans. “Investors were blindsided as the Federal Reserve halved the expected pace of interest rate cuts for next year,” noted Richard Hunter, head of markets at Interactive Investor. The Fed said it expected to cut just twice next year, down from a forecast of four quarter-point reductions signalled in September.

While inflation has “eased significantly”, the level remains “somewhat elevated” compared to the Fed’s long-term target of two percent, Fed chair Jerome Powell told reporters. Powell said he remained “very optimistic” about the state of the US economy, adding that the Fed was now “significantly closer” to the end of its current easing cycle. The Fed’s revision came as a surprise even if investors had speculated about how the US central bank would position itself as President-elect Donald Trump prepares to take office.

Analysts said Trump’s plans to cut taxes, slash regulations and impose tariffs on China risked reigniting inflation. Jack McIntyre, a portfolio manager at Brandywine Global, said although the latest Fed rate-reduction had been priced in by markets, “when you include the forward guidance components, it was a hawkish cut.” “Stronger expected growth married with higher anticipated inflation — it’s no wonder the Fed reduced the number of expected rate cuts in 2025.”