"We can wait and observe economic developments." Federal Reserve Chairman Powell made a cautious statement at the press conference, and this sentence quickly became a key note for interpreting market trends after the interest rate cut.
In the early hours of December 11, Beijing time, the Federal Reserve announced a 25 basis point reduction in the target range for the federal funds rate to 3.50% to 3.75%. This marks the third consecutive interest rate cut of 25 basis points since September of this year. Following the series of rate cuts, the internal divisions within the Federal Reserve and Powell's cautious stance on future policy have instead triggered more complex fluctuations in the financial markets.
1. Decision Implementation: Expected Rate Cut and Internal Divisions
Although the Federal Reserve's decision to cut rates was anticipated by the market, the decision-making process and the signals released after the meeting were filled with complexity. The following table summarizes the key information from this meeting:
The meeting statement reintroduced the wording that future policy adjustments will depend on subsequent data regarding the "magnitude and timing." This was interpreted by the market as a clear signal from the Federal Reserve: any further easing policies in the future will set a higher threshold.
2. Divergence and Volatility After the Rate Cut
After the announcement, global financial markets exhibited a "pulse-like" reaction, with different asset classes quickly diverging in their performance.
● In traditional assets, U.S. stocks reacted positively, with the Dow Jones Industrial Average rising about 1%, and the regional bank index, sensitive to interest rates, soaring 3.3%. Meanwhile, bond prices rose, causing the yield on 10-year U.S. Treasuries to fall.
● In the foreign exchange and commodity markets, a different scenario unfolded: the U.S. dollar index fell about 0.6%, hitting a new low in over a month; precious metals strengthened, with silver reaching a new high; the oil market experienced a V-shaped reversal.
● The most closely watched cryptocurrency market displayed a typical "buy the rumor, sell the news" trend. For example, Bitcoin's price surged after the announcement but quickly fell back over 2.2%. Other major cryptocurrencies like Ethereum also showed similar patterns of rising and then falling back.
3. Why Did the Rate Cut Trigger Market Volatility?
The divergence in market performance stems not from the rate cut itself, but from the deeper signals conveyed by this meeting.
● First, the market follows the rule of "buy the expectation, sell the fact." The 25 basis point rate cut had already been fully priced in and digested by the market. When the expectation was realized, some investors chose to take profits, leading to a correction in asset prices.
● Second, the policy path has shifted to "cautious" and "limited." Goldman Sachs analysts clearly pointed out that the Federal Reserve's "phase of preemptive rate cuts has ended." Whether to continue cutting rates in the future will entirely depend on whether labor market data deteriorates further. Powell also emphasized that current rates are at the "higher end of the neutral range," and the Federal Reserve can fully "wait and observe."
● Furthermore, the Federal Reserve faces a dilemma. On one hand, the job market has shown signs of cooling, which is the core driver of this rate cut. Internal estimates from the Federal Reserve suggest that recent non-farm payroll data may have been overestimated, with actual monthly job additions possibly only at a lower level of 80,000 to 90,000.
● On the other hand, inflationary pressures still exist. The Federal Reserve's preferred inflation measure (PCE) remains well above the 2% target. Powell partially attributed inflation to the tariff policies of the Trump administration, believing they caused a "one-time price shock." This combination of "employment downturn" and "sticky inflation" makes the Federal Reserve's decision-making exceptionally challenging.
4. The Market Will Closely Monitor Employment Data and Political Variables
Looking ahead, the direction of the financial markets will primarily depend on the evolution of two core variables.
● Core Variable One: The "thermometer" of the labor market. As analyzed by Goldman Sachs, the reasonableness of future easing policies will depend on whether labor market data can reach a "higher threshold." Market institutions generally believe that if non-farm payrolls remain below 100,000 and the unemployment rate exceeds 4.5% before spring 2026, it could trigger the Federal Reserve to restart rate cuts. Conversely, the Federal Reserve may only implement 1-2 more rate cuts throughout the year.
● Core Variable Two: Political challenges to policy independence. Political pressure from the White House has intensified market concerns about the continuity of future policies. U.S. President Trump criticized the magnitude of the rate cut as too small and revealed that he has already identified a successor for Powell. Analysts point out that the choice of the next Federal Reserve Chair and their policy inclinations will become a significant variable affecting market expectations.
5. Cryptocurrency: The Interplay of Independent Logic and Macroeconomic Impact
For the cryptocurrency market, the impact mechanism of the Federal Reserve's policies is more complex. It is not simply a matter of "rate cuts benefiting risk assets."
● The liquidity mechanism is more important than the interest rate level. Professional analysis indicates that the market should pay more attention to whether the Federal Reserve is supplementing liquidity to the financial system through operations (such as purchasing government bonds), as this directly affects market makers' willingness and ability to quote for risk assets like cryptocurrencies. If there are only rate cuts without substantial liquidity improvements, the market may react tepidly.
● "Expectation management" determines price trends. Historically, there have been instances where prices fell after rate cuts because the market had already digested the positive news, and traders took the opportunity to lock in profits. This aligns with the logic behind Bitcoin's "surge and fall" performance this time.
● Different cryptocurrencies exhibit significant sensitivity differences. Due to shallower trading depth and typically higher leverage, altcoins are more sensitive to changes in funding costs than Bitcoin. In times of tightening liquidity or increased market volatility, altcoins often experience larger percentage declines.
● Additionally, the potential interest rate hike direction of the Bank of Japan as another important macro variable may exert short-term pressure on the cryptocurrency market by withdrawing global liquidity. Some analyses suggest that the cryptocurrency market may enter a consolidation phase lasting until mid-2026, building momentum for the next cycle.
The global market is digesting a key shift: the Federal Reserve's policy focus has shifted from "preventing economic downturn" to "struggling to balance inflation and employment." The return of the wording "magnitude and timing" in the meeting statement sets a higher data threshold for future rate cuts.
Powell pointed the inflation blame at tariffs, while Trump expressed dissatisfaction with the magnitude of the rate cut. This subtle game between the central bank and the White House adds more uncertainty to the monetary policy outlook for 2026. For cutting-edge risk assets like cryptocurrencies, the expectation of an era of unrestricted liquidity easing has ended, and the market will seek direction in a more complex macro environment that relies more on specific economic data.
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