On November 26, the Federal Reserve released the minutes from the Federal Open Market Committee (FOMC) meeting held on November 6-7. According to these minutes, the Fed may lower interest rates by 25 basis points again in DecemberThis meeting marked a critical juncture for the U.Seconomy and its monetary policy, creating ripples that could potentially reverberate across global markets.

During the meeting, the Fed decided to reduce the federal funds rate target range by 25 basis points, adjusting it to between 4.5% and 4.75%. The committee expressed that further adjusting the monetary policy would help sustain the economy and the labor market's strength while continuing to drive inflation lowerDespite a robust job market with an unemployment rate at a relatively low level, the Fed's assessment carried several concernsManufacturing output has weakened significantly, with declining factory orders and falling capacity utilization rates, attributed to ongoing international trade tensions that threaten export-oriented businesses

On the consumer front, while there is some resilience, the consumer confidence index has shown fluctuations due to external uncertainties, and credit growth is slowingThese factors serve as "speed bumps" on the economic road ahead.

Inflation has persistently failed to reach the 2% target, with core inflation making a convoluted navigation through the complex interplay of fluctuating energy prices and moderate shifts in rentsThis challenging economic backdrop leaves many committee members leaning towards a potential interest rate cut in DecemberBy lowering borrowing costs, the goal is to stimulate business investments and consumer spending, acting as a fiscal "booster shot" for the economy and stabilizing inflation expectationsShould inflation data align with predictions, and if the rate continues its descent toward the 2% mark while the economy remains close to its maximum employment level, then a gradual transition to a more neutral policy stance might become appropriate over time

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The committee's consensus recognized that economic activity is still expanding at a healthy rate, even as job growth has decelerated and the unemployment rate has ticked upwards, albeit still remaining lowMembers noted progress towards the 2% inflation goal, though still slightly above this mark.

If interest rates are indeed lowered in December, the global economy could experience far-reaching effectsEmerging markets could face immediate impacts, balancing the influx of capital against potential currency fluctuationsInvestments that previously flowed into the U.Sdue to high dollar interest rates might now find their way back into these markets, potentially buoying local stock and bond markets, and enriching local financing avenuesYet, this comes with a caveat: the specter of competitive devaluations could resurface, challenging export stability and external debt levels.

Developed economies may find themselves reassessing their monetary policies

Institutions like the European Central Bank and the Bank of Japan might also need to adjust their strategies, thereby enforcing a global “race to the bottom” regarding low interest ratesThis would transform the landscape of negative-yielding bonds and could reshape the profit models of banking and financial institutions like fintech firms and digital payment networks.

In the U.Sitself, mounting expectations of a rate cut have ignited optimism in the housing market, potentially heralding what many are calling a “warm winter.” Mortgage rates have plummeted, providing great relief to aspiring homeowners, thereby stimulating new demand as pent-up desires to purchase homes surgeThe anticipated increase in home transactions could revive builder confidence, leading to heightened construction activity and reinstating vigor across the entire real estate supply chain

Concurrently, the stock market appears poised for revival, spurred on by optimistic liquidity expectationsSectors such as technology and consumer goods stand to gain the most, as lower financing costs allow tech companies to allocate more funds to research and development, fostering innovation, while consumer firms may expand production and market outreachAdditionally, a flood of capital directed toward these sectors can further drive up stock prices.

However, there lurks a significant risk in this approach—a dependency on continually decreasing interest rates can resemble a “poisoned chalice.” While it may bring short-term economic prosperity, it also potentially sows the seeds for asset bubblesWhen a day comes that the Fed needs to pivot to raise rates and tighten monetary conditions, these inflated bubbles could face dire vulnerabilities, leading to catastrophic repercussions for the economy, akin to a sword of Damocles hanging precariously over the market.

The suspense surrounding the Fed’s December decision is gradually dissolving, leaving a palpable tension in the air akin to a taut bowstring