At its meeting on Wednesday, the US Federal Reserve lowered the interest rate to a target range between 4.5% and 4.25%, in line with expectations of a 25 basis point cut.
This is the third consecutive reduction in interest rates, after reducing them by 50 basis points in September and 25 basis points last November, while this is the last meeting during 2024 and during the era of President Joe Biden.
Following the announcement, the financial markets witnessed sharp declines, the most prominent of which was US stocks recording the second worst decline this year amid the US Federal Reserve’s expectations of a slower pace of cuts next year.
These cuts come after the US Federal Reserve began raising interest rates in March 2022 from 0.25% to 0.5%, until they reached their highest levels in more than two decades at 5.5% in July 2023.
The US Federal Reserve has revised expectations for when the inflation target will be reached at 2% from 2026 to 2027, which means high inflation levels for a longer period.
Increasing growth in the second half
US Federal Reserve Chairman Jerome Powell said that the US economy recorded greater growth in the second half of 2024, expecting, during a press conference today after the announcement of the interest cut, that growth would continue during this December and that the economy was on a good path.
He added that the monetary tightening policy followed by the US Federal Reserve was aimed at curbing inflation, which reached its peak since the global financial crisis to record 9.1% in June 2022 after the Russian-Ukrainian war and the rise in prices.
The US inflation rate rose to 2.7% last November, in line with expectations, while the Federal Reserve aims to reduce it to 2%.
Powell confirmed that core inflation will reach 2.5% next year, which is much closer to the 2% goal, indicating that slowing the pace of reduction comes in light of economic growth and declining unemployment rates, especially since the risks of the labor market are diminishing with a gradual and orderly improvement in employment.
Regarding geopolitical events in different regions of the world, the head of the US Federal Reserve said that the Federal Reserve is monitoring geopolitical risks with caution and so far they have not resulted in anything that worries us, indicating that the possibilities we expect are not conclusive.
He explained during his response to journalists that he was confident that inflation would reach its targets, noting that labor market risks were diminishing.
The monetary easing policy comes after inflation became close to the US Federal Reserve’s target of 2%, and an attempt to enhance economic growth and strengthen the labor market.
Market movements
US stocks recorded the second worst decline this year amid expectations of the US Federal Reserve to cut interest rates at a slower pace during 2025. The Nasdaq recorded a decline of 3.6%, the S&P by 3%, while the Dow Jones fell by 2.6%.
Regarding cryptocurrencies, Bitcoin fell 5%, while gold prices fell 2%, and Brent crude fell 0.3%.
Indices fell during today’s trading after the head of the Federal Reserve said that they would need only two rate cuts in 2025, while the Standard & Poor’s 500 index fell by 1.3%, and the Dow Jones fell by 1.1%, while the Nasdaq fell the most by about 1.7%.
Before March 2022, interest rates were at their lowest levels, between 0.0 and 0.25%, and have continued since they were lowered in conjunction with the Corona pandemic to stimulate the affected economic growth at the time, while they have now reached about 5.5%, the highest level in more than 20 years.
The cryptocurrency Bitcoin fell by 5.3% to $100,752, a day after it rose above $108,000 for the first time, in what was a record rise in its value this year, according to what data collected by “Bloomberg” showed that the seven largest digital symbols in terms of market value were They are all low.
Oil prices rose as US crude exports signaled strong global demand, before paring gains after the Federal Reserve reduced the number of interest rate cuts it expects to make next year.
West Texas Intermediate crude advanced 0.7% to settle at less than $71 a barrel, while Brent crude rose slightly to settle above $73. WTI gains narrowed after the session, with the Federal Reserve’s strengthening outlook for the dollar in 2025, making commodities denominated in the currency less attractive.
Winners and losers
Holding other conditions constant, there is an inverse relationship between interest rates and dollar-denominated assets. Gold has an inverse relationship to interest rates. With a reduction in interest, liquidity comes out of assets that resemble it in terms of lower risks, such as bond yields and bank deposits.
Oil benefits from the reduction by stimulating economic growth, and thus the demand for crude, as well as cryptocurrencies, benefit from the reduction due to investments being directed to high-risk assets.
Likewise, stock markets (specifically corporate stocks) are known to have an inverse relationship with interest rates. Lowering interest rates reduces the cost of financing for companies, and thus their investments and expansions increase and their profits grow.
As interest rates are lowered, investments shift from bank deposits and bonds with low returns to high-risk stocks with high returns. In addition, investors who borrow to trade securities tend to borrow in light of low interest rates, and momentum in the stock markets increases.
Real estate sector
It is natural that real estate prices will rise during the coming period with the reduction in interest rates, given that it is one of the assets to which liquidity emerging from bank deposits is directed, in addition to sector activity with the expected rise in corporate and individual borrowing.
Lowering interest rates supports spending and consumption by individuals and companies, enhances countries’ economic growth, and reduces unemployment rates while creating new jobs as a result of economic expansion.
On the other hand, the dollar and its related currencies are harmed by the interest rate cut as demand for it declines, while currencies other than the dollar and related currencies benefit.
The exports of the United States of America and the countries that peg their currencies to the dollar benefit, given that lowering interest rates reduces the American currency and the currencies tied to it, thus raising the external competitiveness of these countries’ products due to their lower cost to importers there, while the decline of the dollar reduces the cost of American imports, as well as the countries that peg their currencies. In US currency.
Main rate cut
The Federal Reserve lowered the interest rate on the mechanism used to help control the benchmark interest rate with the aim of supporting the smooth functioning of US financial markets, in addition to reducing its decision on key interest rates.
Monetary policy officials cut the overnight reverse repo rate relative to the lower end of the target range by 5 basis points, according to a rate decision statement issued on Wednesday.
Taking this into account, along with the Federal Reserve lowering the overall target range for the US central bank funding rate to 4.25% and 4.50%, the new interest rate on the overnight reverse repurchase agreement is 4.25%, bringing it to the lower end of the target range for the US central bank interest rate. Funding interest at the Federal Reserve for the first time since 2021.
Financial analysis unit
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