Global markets have faced a downturn following the Fed’s recent monetary policy meeting, with European and Asian stock indices declining. The U.S. Federal Reserve implemented its third rate cut of 0.25 points, signaling a cautious approach moving forward. As inflation remains above target, market expectations shifted, contributing to significant drops in major U.S. indices. Additionally, the yen weakened against the dollar amid Japan’s unchanged key rate and growing uncertainties in its economic outlook.
Global Markets Experience a Downturn
The recent monetary policy meeting held by the Fed has sent shockwaves through global markets, leading to a notable decline. By 09:10, European stock markets were in the red, with Paris dropping by 0.98%, Frankfurt by 0.86%, and London down by 1.00%. In Asia, the Shanghai Stock Exchange saw a dip of 0.36%, while Hong Kong fell by 0.56%, and Tokyo recorded a 0.69% decrease. Bruno Cavalier, chief economist at Oddo BHF, stated, “The Fed entered a new phase of easing yesterday.”
Rate Cuts to Slow Down
As anticipated, the U.S. Federal Reserve has initiated its third rate cut of 0.25 points, adjusting key rates to a range between 4.25% and 4.50%. Despite meeting market expectations, the Fed’s outlook has not been well-received by investors.
Jerome Powell, the Fed chairman, noted that the institution is “getting very close” to concluding its rate-cutting cycle. He emphasized that the Federal Open Market Committee (FOMC) will adopt a “more cautious approach” regarding future rate reductions. Powell acknowledged, “Inflation has significantly slowed over the past two years, but it remains relatively high compared to our long-term target of 2%.” The Fed now anticipates a PCE inflation index of 2.5% by the end of 2025, with a return to the 2% target expected only by the end of 2026.
The Fed’s more measured approach to rate cuts has led to a shift in market expectations. Independent analyst Andreas Lipkow remarked, “A new rate-cutting bubble has thus burst,” and added that “market participants no longer expect more than two rate cuts at most in 2025,” each by a quarter point. This shift negatively impacted Wall Street, which saw the Dow Jones drop 2.58%, the Nasdaq index fall by 3.56%, and the broader S&P 500 index decrease by 2.95%. Florian Ielpo, head of macroeconomic research for Lombard Odier IM, noted that this Fed correction “surprised both equity and bond markets.”
Yen Weakens Amid Market Shifts
Following the developments in the U.S., yields on 10-year bonds of major European nations increased on Thursday. By 9 a.m., the French yield rose to 3.09% from 3.05% the previous day, the German yield climbed to 2.28% from 2.24%, and the British yield increased to 4.63% from 4.56%. With persistent inflation in the UK, analysts anticipate a meeting of the Bank of England on Thursday, where it is expected to maintain its key rate at 4.75%.
The Fed’s announcements are also impacting currency markets. John Plassard, an investment specialist at Mirabaud, predicted that “the interest rate gap between the Fed and the European Central Bank is expected to widen again, putting pressure on the euro against the dollar.” The euro stabilized around 1.0409 dollars per euro after experiencing a decline post-Fed announcements.
In this financial landscape, the yen continued its downward trend against the dollar on Thursday, exacerbated by the Bank of Japan’s decision to keep its key rate unchanged at 0.25%. This decision was attributed to “high uncertainties” surrounding Japan’s economic activity and inflation. The yen weakened further against the dollar, trading at a month-low of 156.730 yen per dollar, compared to 154.80 yen the previous evening.