The Fed cut rates by 25bps, as expected, to 4.25-4.5% in an 11-1 split, with Hammack voting to leave rates unchanged; the median dot plot for 2025 and 2026 FFR forecasts were lifted above expectations.
Fed Chair Powell said the decision was a "closer call", but the "right call", suggesting there was a discussion surrounding holding rates at this meeting, and that "extent and timing language" shows Fed is at or near the point of slowing rate cuts, and the slower pace of cuts reflects expectation.
APAC stocks traded with losses across the board amid the fallout from the hawkish Fed, as sentiment from Wall Street reverberated to the region.
BoJ maintained its rate at 0.25% as expected, with an 8-1 vote; Board Member Tamura dissented, advocating for a 25bps hike to 0.50%; eyes on Governor Ueda's presser.
European equity futures are indicative of a softer open following the late selling stateside, with the Euro Stoxx 50 future -1.6% after cash closed +0.3% on Wednesday.
Looking ahead, highlights include US Jobless Claims, Philly Fed Index, NZ Trade Balance, Japanese CPI, BoE, Riksbank, Norges, CNB, Banxico Policy Announcements, BoJ Governor Ueda, Norges Bank’s Bache, Riksbank’s Theeden, Supply from the UK.

FOMC MEETING

FOMC STATEMENT & PROJECTIONS:

The Federal Reserve cut rates by 25bps, as expected, to 4.25-4.5% in an 11-1 split, with Hammack voting to leave rates unchanged. The statement was little changed from the November meeting, but added in considering the "extent and timing" of additional rate adjustments (prev. In considering additional adjustments), the Fed will assess incoming data, evolving outlook and balance of risks.
However, the further hawkish skew came in the updated Summary of Economic Projections (SEPs) whereby the median dot plot for 2025 and 2026 FFR forecasts were lifted above expectations. Recapping, the median 2025 dot rose to 3.9% from 3.4% (exp. 3.6%), while the 2026 median rose to 3.4% (exp. 3.1%, prev. 2.9%). 2027 and longer run median dot plots rose to 3.1% (prev. 2.9%) and 3.0% (prev. 2.9%), as expected. As such, the 2025 median dot plot looks for just two cuts in 2025.
Elsewhere, Core PCE inflation is now seen at 2.5% for 2025 (exp. 2.3%, prev. 2.2%) and 2.2% for 2026 (exp. 2.0%, prev. 2.0%). Forecasts for the unemployment rate were largely as expected, with all horizons, ex-longer run, seen at 4.3%, although 2027 was expected. In addition, and as was alluded to in the latest Minutes, the Fed lowered the repo rate by 30bps to 4.25% (lower end of FFR target, vs 5bps above lower end previously).

FED CHAIR POWELL PRESSER:

In Chair Powell's pre-prepared remarks he stated the Fed is squarely focused on two goals, and that the economy is strong, the labour market remains solid, and inflation is much closer to the 2% goal. Ahead of November PCE on Friday, Powell said total PCE probably rose 2.5% in the 12 months ending in November, while core PCE prices probably rose 2.8% in November.
The Chair added that the policy stance is now significantly less restrictive, and going forward they can be more cautious, something which was indicated from the updated SEPs and statement tweak.
In the Q&A, the distinct hawkish remark came from the first question, which accentuated hawkish market moves, as Powell said that today's decision was a "closer call", but the "right call", suggesting there was a discussion surrounding holding rates at this meeting. Powell added risks are two-sided, and trying to steer between those two risks.
Chair Powell stated that "extent and timing language" shows Fed is at or near the point of slowing rate cuts, and the slower pace of cuts reflects expectation. Powell said that cuts they make in 2025 will be in response to data and as long as the labour market and economy are solid, they can be cautious as they consider further cuts. In addition, looking at US President-elect Trump's term, Powell said some people did take a very preliminary step and incorporated conditional effects of coming policies in their projections.
NOTE: One committee member sees no cuts in 2025, and one sees five 25bps rate cuts - showing a wide range of views on the Fed, but many were centred around the median. Continuing to look ahead, Powell said it will be looking for further progress in inflation to make those cuts, and added that from here is a new phase, and the Fed is going to be cautious about further cuts.

FED MARKET REACTION

STOCKS: Sold off across the board and SPX saw its worst "Fed day" since 2001, according to Bloomberg.
FX: DXY surged against major peers to a 108.27 high as the Fed delivered a hawkish cut - i.e. a 25bps cut as expected, but raising FFR projections above expectations, particularly in 2025.
BONDS: Dived after Fed signals slower rate path ahead; US 10-year yield rose above 4.50%.
COMMODITIES: Sold off post-settlement after the hawkish FOMC.
CRYPTO: Extended on recent losses with Bitcoin slipping under USD 101k.
MARKET IMPLIED FED RATE CUT PRICING: January 2bps (prev. 4bps), March 12bps (prev. 17bps), May 15bps (prev. 23bps), December 2025 34bps (prev. 48bps); (prev. = pre-FOMC and incorporated for today's rate cut).

BOJ MEETING

BOJ STATEMENT:

BoJ maintained its rate at 0.25% as expected, with an 8-1 vote; Board Member Tamura dissented, advocating for a 25bps hike to 0.50%. The central bank said inflation expectations were heightening moderately, and inflation was likely to reach a level generally consistent with the BoJ's price target in the second half of the three-year projection period through fiscal 2026.
However, uncertainty regarding Japan's economic and price outlook remains high, the central bank said. BoJ highlighted the need to scrutinise FX and market movements, along with their impact on Japan's economy and prices.
BoJ said the impact of FX volatility on inflation could be greater than in the past due to changes in corporate wage and price-setting behaviour. Meanwhile, Japan's economy was recovering moderately despite some weaknesses, with private consumption increasing.

REACTION

Little action was seen outside of Japanese assets; USD/JPY and JGB futures saw upside, Nikkei trimmed some earlier losses (more details below).
NOTE: Traders typically get more colour on the BoJ's thinking via Governor Ueda's press conference, which is slated for 06:30GMT.

US TRADE

EQUITIES

US stocks saw considerable downside (SPX -2.95%, NDX -3.6%, DJIA -2.58%, RUT -4.4%) in wake of the hawkish FOMC cut, while sectors were all notably in the red with Consumer Discretionary plunging 4.75% and weighed on by Tesla's (TSLA) (-8.5%) weakness.
SPX -2.95% at 5,872, NDX -3.60% at 21,209, DJIA -2.58% at 42,327, RUT -4.39% at 2,232
Click here for a detailed summary.

NOTABLE HEADLINES

Morgan Stanley now expects the Fed to deliver two 25 bps rate cuts in 2025 (prev forecast of three 25 bps cuts) following the December FOMC meeting, according to Reuters.
US President-elect Trump said he's totally against stopgap bill, Fox News reported. President-elect Trump and Vance called for a temporary funding bill without "Democrat giveaways" combined with an increase in the debt ceiling; Congress should debate the debt limit now.
Micron Technology Inc (MU) - Q1 2025 (USD): Adj. EPS 1.79 (exp. 1.77), Adj. Revenue 8.71bln (exp. 8.71bln). Adjusted gross margin 39.5% (exp. 39.5%). Adjusted operating income 2.39bln (exp. 2.34bln). Adjusted operating income margin 27.5% (exp. 27%). Cash flow from operations 3.24bln (exp. 4.1bln). Guidance: Sees return to growth in H2 of FY. Q2 adj. revenue 7.7-8.1bln (exp. 8.99bln). Q2 adj. gross margin 37.5-39.5% (exp. 41.3%). Q2 adj. EPS 1.33-1.53 (exp. 1.92). Fiscal Q2 bit shipment outlook weaker than expected. Prioritizing investments to ramp 1β & 1γ tech nodes. Commentary: The PC refresh cycle is unfolding more gradually. Sees sale of projects to China-headquartered customers to be concentrated in high-end customer portfolios for the remainder of 2025. Shares fell 15% after-market.
Micron (MU) executive said see conditions for margin expansion occurring after Q3, and added they saw some moderation in purchases of data centre SSDs after several quarters of rapid growth.
Apple (AAPL) said Meta (META) has made 15 requests for potentially far-reaching access to Apple's technology, and it raises concerns about users' privacy and security as it made more requests than other firms, according to Reuters.
Apple (AAPL) is reportedly in talks with Tencent (700 HK) and ByteDance to integrate their AI features into iPhones sold in China, according to Reuters sources.
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