The economy is strong but inflation is stubborn! The Fed may be afraid of easing interest rates. How will the market behave next year?

Economic data exceeds expectations, Fed attitude attracts attention.

The Fed is expected to announce its latest interest rate decision in the early hours of December 19th, Taipei time. The market generally expects another 0.25 percentage point rate cut, lowering the effective interest rate from 4.7% to 4.4%. However, what is really noteworthy is not the size of this rate cut, but the Fed's forward-looking stance on the interest rate path for 2025. Although the legislative body vaguely promised a 100 basis point rate cut next year in September, Wall Street's expectations have become more conservative, with some traders predicting only a 50 basis point cut next year.

However, some economists hold a more optimistic or moderate position. According to Torsten Slok, Chief Economist at Apollo Global Management, recent US economic data is strong, with GDP for the third and fourth quarters revised up to 2.8% and 3.3% respectively, far above the original CBO estimate of 2% 'sustainable growth' level. At the same time, inflation, although down, remains stubbornly sticky, with CPI still hovering between 3% and 4%, higher than the official target of 2%. This 'strong economy, lower-than-expected cooling of inflation' situation has led some experts to believe that the Fed may not dare to loosen its grip too quickly next year.

The pace of interest rate cuts is tense, and volatility is feared to intensify

From a market perspective, Wall Street's conservative adjustments are accompanied by the difficulty of Fed's decision making. High interest rates and insufficient inflation mean that if the Fed rashly cuts interest rates significantly next year, it may help to promote excessive loose funds, and once again push up inflation pressures. Slok expects that the Fed may slightly raise the target for the interest rate path in 2025 (such as from the previous expectation of 3.4% to 3.7%), which is between Wall Street's current expectation of 3.9% and the middle value that the Fed previously promised.

What does this move mean for the market? If the interest rate is higher than expected but still gradually declining, the overall cost of capital continues to decline, which is conducive to borrowing and leveraging, leading to more funds flowing into risky assets (including stocks and cryptocurrencies), pushing up their prices. However, as the rate cut may not be as optimistic as some expect, it may also trigger short-term market adjustments or fluctuations. The market still needs to evaluate: if the Fed's more cautious expectations for rate cuts are not strong enough to boost risk appetite, will investors rethink their asset allocation strategies?

The new regulatory environment and policy changes will determine future market trends.

Another key factor affecting the interest rate path in 2025 is the US policy environment. If the government that takes office after the 2024 election (such as Trump returning to power) tends to have loose financial regulations and encourages capital investment, the cryptocurrency market may have a more favorable regulatory environment. New policies such as tax cuts, tariffs, and immigration control could potentially push up inflation, making the expected interest rate cuts by the Fed less aggressive. However, once the policies maintain a healthy economy rather than an 'emergency interest rate cut,' this is actually a positive sign for long-term investors: it shows strong economic resilience and a more stable financial market.

On the other hand, cryptocurrency analysts observe that Bitcoin has recently reached a new high of $108,367, and the market expects a loose monetary environment to continue driving the strength of risk assets. If investors expect a significant interest rate cut to boost sentiment, they may need to evaluate rationally: the Fed may only give a slightly looser signal than expected, and once there is a psychological gap in trading, there may be a temporary pullback in price.

Source: TradingView Bitcoin continues to hit new highs, with prices recently reaching a high point of 108,367.

Key: Prudent rate cuts replace drastic interest rate cuts Please input the text to be translated. In conclusion, after the Federal Reserve's interest rate decision in December, the market's view on the magnitude of interest rate cuts in 2025 is likely to be more 'neutral': not no cuts, but gradual cuts. Although inflation is trending towards the target, it remains 'stubborn'; although the economy is still strong, the Fed is unwilling to stimulate excessively. The Fed will adjust its pace based on actual data and policy variables, rather than opting for a 'one-time large cut' for short-term satisfaction.

For the market, this is a calm and pragmatic signal. The overly optimistic rate cut expectations need to be adjusted, but at least a mild monetary environment can still be expected, providing long-term moderate support for stocks, bonds, and even the crypto market. The conclusion is: under the multiple games where economic performance exceeds expectations, inflation is not enough to fall, and regulatory environment needs to be clarified, the pace and extent of rate cuts in 2025 will still be the key factor affecting market trends. Investors need to manage risks, adjust investment strategies timely to cope with the subtle changes that Fed's 'flexible rate cuts' may bring.

[Disclaimer] The market carries risks, and investment should be cautious. This article does not constitute investment advice. Users should consider whether any opinions, perspectives, or conclusions in this article are suitable for their specific circumstances. Responsibility is assumed for investment based on this.

This article, originally published in 'Crypto City', discusses the strong economy but persistent inflation, and the potential impact of the Federal Reserve's potential interest rate cuts on the market next year.