As expected by the market, the Federal Reserve concluded its year-to-date interest rate decision by cutting rates by 25 basis points in the early hours of December 11th, Beijing time. This lowered the target range for the US federal funds rate to 3.50% to 3.75%.
However, to the market's surprise, after officially ending its balance sheet reduction earlier this month, the Federal Reserve is about to restart its balance sheet expansion. The Fed will launch its reserve management tool on December 12 to resume purchasing Treasury bonds in order to create an environment of "ample reserves".
Behind the decision lies a clear rift within the Federal Reserve. This interest rate decision marks the first time in six years that three "dissenting" votes have been cast, suggesting that rate cuts are no longer the "majority's" default practice, but rather an extreme trade-off resulting from multiple competing forces.
The Federal Reserve cut interest rates for the third time this year.
This rate cut by the Federal Reserve is the third rate cut this year, following 25 basis point cuts in September and October, and the sixth rate cut since the Fed began a new round of rate cuts in September 2024.
It is worth noting that the Federal Reserve's interest rate decision was the first time since 2019 that it was rejected by all three voters. Specifically, Federal Reserve Governor Stephen Milan opposed the decision, advocating for a one-time 50 basis point rate cut; Kansas City Fed President Schmid and Chicago Fed President Goolsby opposed the rate cut and preferred to keep the rate unchanged.
“Since 2019, there have never been three or more dissenting voices at the interest rate meeting, a situation that has only occurred nine times since 1990,” Jerry Chen, a senior analyst at Gain Capital, told Shanghai Securities News . According to reporters, although an interest rate cut was a highly probable event expected by the market, the prolonged government shutdown and the resulting lack of key economic data exacerbated the divide between the doves (concerned about employment) and the hawks (concerned about inflation), resulting in the largest internal division within the Federal Reserve in a long period of time at this meeting.
Restarting balance sheet expansion is not quantitative easing.
The more crucial point to watch at this meeting is the Federal Reserve's resumption of "balance sheet expansion".
In its statement, the Federal Reserve said, "The Committee believes that reserves have fallen to an adequate level and will initiate operations to purchase short-term Treasury securities as needed to maintain an adequate supply of reserves."
Regarding further details surrounding the "balance sheet expansion," Federal Reserve Chairman Jerome Powell stated at a press conference that the Fed will begin purchasing $40 billion in short-term Treasury bonds starting December 12. The scale of bond purchases is likely to remain high in the coming months, but will then gradually decrease, with completion expected by April 15th of next year.
According to Chen Jierui, the Federal Reserve's resumption of balance sheet expansion is imminent, only the timing is earlier than expected. Although the Fed's resumption of balance sheet expansion sends a dovish signal, many industry insiders warn that it should not be equated with "QE" (quantitative easing).
The Federal Reserve has significantly raised the threshold for interest rate cuts.
This meeting did not provide further signals regarding the possibility of future interest rate cuts, suggesting that the Fed's rate-cutting decisions may return to a "data-dependent" approach. "Monetary policy does not have a fixed path; the Fed will make decisions at each meeting," Powell stated. He added that the Fed has been adjusting towards the neutral interest rate and is currently at the upper end of the neutral interest rate range.
The dot plot indicates that Federal Reserve officials' median expectation for interest rate cuts is a further 25 basis point cut in 2026 and another 25 basis point cut in 2027. This forecast is largely consistent with their September projections. Furthermore, Fed officials have raised their median forecast for 2026 economic growth from 1.8% in September to 2.3%.
"Given the current interest rate levels, the threshold for the Federal Reserve to cut rates has clearly increased. The Fed will enter a period of observation in the first half of next year, and the pace of interest rate cuts will slow significantly. The political drama surrounding the Fed's independence will officially begin." —Guolian Minsheng Lin Yan, chief macro analyst at the Securities Research Institute, said.
(Source: Shanghai Securities News)
