The recent decision by the Federal Reserve to lower interest rates on December 18 marks a significant moment for the U.Sfinancial markets, steering them into a new phase of adjustmentWhile the rate cut aligned with market expectations, predictions from Fed officials hinted at only two more potential cuts by 2025, which shattered the market's dreams of continual aggressive reductionsInvestors are now forced to confront the economic realities where inflation pressures still loom large, compelling the Fed to proceed carefully to avoid reigniting inflationary fires, an issue that has never truly been under control in the U.S.

As of December 20, the "trading effect" from earlier market shifts had diminished or nearly vanishedOn November 5, the closing figures for the S&P 500, Dow Jones Industrial Average, and Nasdaq were 5929.04, 41835.49, and 18250.71, respectivelyBy December 20, those figures marginally rose to 5930.85, 42840.26, and 19572.60, reflecting a modest increase of 0.03%, 2.4%, and 7.2%. Contrary to market predictions, the yield on 10-year U.S

Treasury bonds continued its ascent, climbing from 4.431% to 4.529%. The dollar index also experienced a boost, rising from 103.91 to 107.82 during that same periodCryptocurrencies like Bitcoin and Ethereum emerged as significant beneficiaries of the new regulations, experiencing substantial surges in their closing prices—from $75586.35 to $97380.5 for Bitcoin, and from $2721.85 to $3386.27 for Ethereum, corresponding to increases of 28.83% and 24.41%, respectively.

Interestingly, investors seemed to adopt a more pessimistic outlook than the Fed itselfFed Chair Jerome Powell remains optimistic about the economic landscape, asserting that the job market's cooling is not deeply concerning and that risks of economic downturn are minimalHe projected a 2.5% economic growth rate for 2024, asserting that inflation rates would stabilize around the same figure and that although the job market is experiencing a slowdown, it maintains a robust condition

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He anticipated a stronger economic performance in the latter half of 2024 compared to the first, with unemployment statistics expected to surpass forecasts while uncertainties diminishHowever, Powell also recognized that inflation risks are higher than expected, potentially reaching even greater heights.

During the press conference, Powell elaborated on forecasts from Fed economists, indicating an expected economic growth rate for 2025 slightly beneath 2024 levels, eventually aligning with long-term trendsThe economists projected a more optimistic job market situation, yet voiced concerns regarding persistent inflation, characterizing it as stubborn with a gradual decline that may take one to two years to meet policy targetsThe anticipated pace at which the Federal Funds Rate will adjust is now expected to be slower than previously indicated in September.

Market sentiment, however, suggests that investors are far less trusting of the Fed's projections for the economy

Economic data is generally accessible, but interpretation varies, and future monetary policy changes will heavily depend on labor market conditions and inflation trendsWith uncertainties regarding employment and inflation, the Fed finds itself amid competing interests: rapid rate cuts could hinder inflation reduction, conversely, slow movements might stifle economic activity and job growthThe Fed is likely to cut rates, but under specified conditions: should economic growth exhibit strength yet fail to bring inflation down to the target of 2%, adjustments will be gradualShould the job market surprisingly weaken, or if inflation declines quicker than anticipated, rate cuts will accelerate.

The responses from Powell during the press conference border on self-deprecating humor, almost rendering it a "public relations show" for the FedThe nuances in inflation and employment market fluctuations are unpredictable and challenging to navigate, leading to frequent misjudgments by the Fed, which has tarnished its public reputation

Thus, markets should refrain from over-interpreting the Fed's economic assessments.

The dynamics of the job market frustrate many—though the Fed's official stance indicates that risks to employment have minimized, the reality is that the job market still operates below pre-pandemic levels and is subject to continued coolingAlthough mass unemployment hasn’t manifested, hiring rates lag, demand for labor is decreasing, and new job opportunities fall short of what’s necessary to stabilize employment ratesThe Fed is wary of the potential for a cooling job market to come at the expense of guiding inflation back to the 2% target.

Powell frequently highlights the Fed's accomplishments in combating inflation, asserting that the rate is trending towards the desired targetInflation in America is now perceived more clearly: commodity prices have reverted to pre-pandemic levels, rental markets and market-based service prices remain relatively stable, with the exception of non-market pricing services where direction remains ambiguous

Powell understands that numerous factors influence inflation—including U.Sfiscal policies, tariff regulations, geopolitical risks, and regional conflicts—making the path of inflation difficult to predict.

The potential for the new administration to pursue expansionary fiscal policies looms largeOn November 5, total U.Sfederal debt approached $36 trillionRemarkably, within just over a month, it surged to $36.25 trillionA looser fiscal policy will likely exacerbate governmental debt levelsMoreover, how the new administration's tariff policies affect the economy and inflation adds another layer of uncertainty, as these policies are yet to materialize, leaving the Fed in a holding pattern, evaluating the potential impactsIn 2018, the Fed simulated similar policy scenarios but the present circumstances differ significantly, meaning those previous results might not apply now

The inflation index comprises four main sectors: food and energy products (approximately 20% weight), non-food and energy commodities (around 19%), rental services (36.63%), and non-rental services (25%). Price fluctuations in any segment can influence the overall price level substantially, illustrated by variables such as used car and energy prices.

Looking ahead, what can we expect from monetary policy and capital market trends? The Fed reiterates that interest rates are nearing neutral levels, with the Federal Funds Rate dropping to 4.3%, though the policy remains tightDespite having cut rates by 100 basis points, U.Smortgage rates, auto loan rates, and credit card interest rates have shown minimal change, indicating a disconnect that diverges from the Fed’s previous policy projections, leading to negative repercussions across financial markets.

This year has been fruitful for the U.S

capital markets, buoyed by expectations of rate cuts and a surge in AI investmentsThus far in 2024, the S&P 500 has risen 26.06%; companies like Apple, Nvidia, Microsoft, Amazon, Google, Facebook, and Tesla have reported astounding valuations, with their market capitalizations reaching $3.85 trillion, $3.3 trillion, $3.25 trillion, $2.37 trillion, $2.35 trillion, $1.48 trillion, and $1.32 trillion respectively, showcasing impressive growth ratesHowever, undue reliance on these heavyweight stocks poses significant risks; slow adjustments in interest rate policies could inflate stock price bubbles, severely skewing actual investment valuationsWarnings suggest that U.Sstock prices may require at least a 20% adjustment downwardsAlthough the Fed remains upbeat about the economy, significant underlying vulnerabilities persist, and irrational exuberance is becoming more apparentIf the job market falters or inflation revives, substantial stock market corrections are inevitable.

While the yield on ten-year U.S

Treasury bonds has risen, alleviating some concerns around yield curve inversion, high long-term interest rates introduce a strain on financing costs for households, businesses, and the government—a troubling trendShould the U.Sgovernment neglect to address its immense debt predicament while masking inaction with economic theories that advocate for deficit expansion, myriad economic troubles are likely to ensueThe massive debts accrued during the low-interest-rate era could act as a cancerous growth, compromising the very foundation of the American economy.

Future adjustments to monetary policy cannot solely rely on the assumption that economic growth will maintain its current trajectory, especially as the new administration enters another political cycle, with governance increasingly impacting economic trendsThe Fed's anticipated monetary policy pathway might shift due to pressures from the newly elected government, calling into question its independence