Global Financial Markets React to Fed's Final Policy Decision of 2024

Global financial markets reacted strongly to the U.S. Federal Reserve's final policy decision of the year, which delivered the expected 25 basis point interest rate cut but signalled a slower pace of easing in 2025. The Fed's updated dot plot now projects just two 25bp cuts next year, down from four previously, and a higher longer-run federal funds rate of around 3%.

Market Reactions

U.S. stocks tumbled after the announcement, with the tech-heavy Nasdaq falling 3.6% and the S&P 500 losing 3%. The U.S. dollar surged nearly 1.2% as Treasury yields jumped. Fed Chair Jerome Powell characterised the decision as a "hawkish cut", noting that inflation has made progress but remains somewhat elevated. He indicated that with the fed funds rate now in the 4.25-4.5% range after 100 basis points of cuts, policy is nearing the point where the pace of easing can slow.

Economic indicators such as U.S. retail sales and industrial production were weaker than expected, although consumer resilience persists. In Europe, UK inflation aligned with the Bank of England's forecasts, whereas German business confidence fell to a four-year low, highlighting divergent monetary policy impacts across the region.

In Australia, the November job market offered a positive surprise with unemployment falling to 3.9%. However, high inflation has dampened consumer sentiment, leading to a 1.7% decline in the Australian dollar following the Fed's decision. Commodity currencies generally underperformed as oil prices dropped.

Central Bank Movements

Meanwhile, the Bank of England and Bank of Japan both held rates steady as widely expected. The BoE remains concerned about sticky services inflation and rising wages, with markets paring rate cut expectations for 2025. The BoJ refrained from adjusting policy for now but is expected to begin normalising as early as January.

Now the focus turns to how quickly inflation will return to target and how much monetary easing will ultimately be required. For now, policymakers appear content to move gradually, but a worsening growth outlook or failure of price pressures to abate could force their hand. As Fed Chair Powell put it, the road ahead remains foggy, requiring central banks to proceed with caution.

Sector-Specific Developments in 2024

In terms of sector-specific developments, technology and major tech stocks continued to dominate market discussions. The MAG Seven—major tech giants—experienced substantial growth after initial post-election volatility, closing the year on a high note. This contrasts sharply with smaller indices which struggled and ended the year lower. Notably, the automobile sector, heavily influenced by Tesla’s market activity, emerged as unexpectedly volatile, deviating from its traditionally defensive stance.

Looking Forward

The coming year looks to bring new challenges, with an expected U.S. economic boom but also looming risks from restrictive trade and immigration policies under the incoming Trump administration. Much depends on whether inflation can be tamed without a major hit to employment and growth. For Australia, addressing weak productivity will be key to boosting living standards and the economy's resilience to global crosswinds. Only time will tell if 2024's central bank manoeuvring has set the stage for a soft landing or something more bumpy.

U.S. and Australian Share Markets at the Start of 2025

As 2025 begins, the U.S. stock market is expected to continue its upward trajectory, driven by strong corporate earnings and declining interest rates. The S&P 500 gained 23% in 2024, marking its first two-year stretch of +20% returns since the late 1990s. However, analysts caution that market volatility could increase due to geopolitical and domestic policy uncertainties.

In Australia, the S&P/ASX 200 index ended 2024 up 11%, driven by price-to-earnings expansion. The tech sector was the standout performer, achieving a 48.5% total shareholder return, while the resources sector struggled. As 2025 begins, rising bond yields and economic uncertainties are expected to dampen growth, with a cautious start anticipated for Australian equities.