In bond markets, 10-year U.S. Treasury yields rose to 4.506%, the highest level since May 31, after the Fed signaled a pause on further rate cuts.
Fed implements a ‘Hawkish’ interest rate cut
On Wednesday, the Fed cut rates by 25 basis points to 4.25% – 4.50%, as widely expected. However, the FOMC’s economic projections pointed to a less accommodative interest rate path for the Fed in 2025, roiling markets.
The Fed raised its growth and inflation expectations and lowered its unemployment outlook. Notably, the Fed raised its 2025 Fed Funds Rate projection to 3.9%, up from 3.4% in September, dampening risk sentiment.
According to the CME FedWatch toolthe probability of a Fed rate cut in January fell by 25 basis points from 16.8% on December 17 to 6.4% on December 18.
Bank of Japan stabilizes policy under yen pressure
On Thursday, December 19, the Bank of Japan kept interest rates stable at 0.25%. The policy freeze allows Kazuo Ueda, governor of the Bank of Japan, to provide clues about the timing of a rate hike.
Alicia Garcia Herrero, chief economist at Natixis Asia Pacific, commented on the BoJ’s decision to forego a rate hike in December ahead of the announcement.