The Federal Reserve's latest 25-basis-point rate cut came with a surprise: fewer rate reductions planned for 2025. This hawkish stance sent the dollar soaring and markets tumbling. Meanwhile, U.S. Q3 GDP growth exceeded expectations at 3.1%, driven by strong exports and consumer spending. As global central banks chart divergent paths, all eyes are on today's PCE inflation data for further market direction.

PCE Data Looms Large: Will Inflation Fuel the Dollar Rally?
Federal Reserve officials, as widely expected, lowered borrowing costs by 25 basis points on Thursday. However, their more cautious stance on next year's rate cuts caught markets by surprise. Policymakers now anticipate only a half-point reduction over the next 12 months.
Following the Fed's decision and Chairman Jerome Powell's remarks, the U.S. dollar surged to its highest level since 2022, while benchmark 10-year Treasury yields climbed to 4.57%, the highest since May. U.S. equities tumbled approximately 3%, with the S&P 500 recording its steepest Fed decision-day drop, excluding the pandemic era, since 2001. Other currencies suffered significant losses against the greenback.
The U.S. economy has recently shown strong performance. Reflecting this, the Fed updated its forecasts for 2025, projecting higher inflation, stronger growth, and lower unemployment in the coming year.
A report released Thursday evening by the Bureau of Economic Analysis revealed that the U.S. economy grew more robustly in the third quarter than previously estimated. Real gross domestic product (GDP) expanded by 3.1% year-over-year, up from the earlier estimate of 2.8%.
The upward revision was primarily driven by increased exports and consumer spending. Growth in consumer spending reached 3.7%, marking the fastest pace since early 2023. Exports, led by a surge in services, grew more quickly than initially anticipated. Imports, which subtract from GDP calculations, also increased.
The report also noted a slight uptick in the Fed's preferred inflation measure. The core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices, rose to 2.2% in the third quarter from the previous estimate of 2.1%.
In a separate report on Thursday, data showed a drop in unemployment claims after a rise in the previous week. Initial jobless claims fell by 22,000 to 220,000 in the week ending December 13, coming in below the median forecast of 230,000. Continuing jobless claims, which track the number of people still receiving benefits, decreased to 1.87 million from the prior week's 1.88 million.
Weekly figures often reflect seasonal and temporary factors, but the gradual rise in continuing claims this year signals a cooling labor market. The average duration of unemployment increased from nine weeks a year ago to 10.5 weeks in November. However, while this indicates a moderate slowdown in the labor market, it does not suggest a worrisome downturn.
As the week draws to a close, markets will focus on today's November PCE data, seeking further clues about fourth-quarter inflation. Core PCE is expected to rise from 2.8% to 2.9%. A reading above expectations could lead to further strengthening of the U.S. dollar.
Gold Breaks Its Luster as Dollar Dominates the Stage
Gold is heading for a weekly decline after the Fed signaled fewer rate cuts next year than previously anticipated. While the Fed delivered its third consecutive rate cut this year—typically a positive factor for gold—traders shifted their focus to the bank's outlook for 2025. Expectations that rates will remain higher for longer drove gold prices down by over 2%.
During the post-decision press conference, Chair Powell emphasized that future cuts would depend on progress in inflation. Recent data suggests that price pressures in the U.S. are picking up again. In this context, November inflation figures set to be released today will be critical for the gold market.
Higher inflation could reinforce expectations that rates will stay elevated for an extended period. This could strengthen the dollar further and increase downward pressure on gold prices.

Global Central Banks in Focus: Diverging Paths Shape Markets
This week, markets also closely followed key central bank decisions from around the globe. On Thursday, the Bank of Japan (BoJ) kept interest rates steady at 0.25%. Governor Kazuo Ueda reiterated that the central bank would continue raising rates if its forecasts materialize.
However, he emphasized there was no rush, citing uncertainties driven by U.S. policy and a lack of clarity on wage trends. Ueda stated that wage patterns would likely become clearer by March or April, suggesting the BoJ could wait until then to consider a rate hike.
According to strategists, the BoJ's dovish stance may fuel carry trade activities, potentially leading to further depreciation of the yen against the dollar.
Meanwhile, on Thursday, markets were also focused on the Bank of England (BoE). While some BoE officials called for an immediate rate cut, the majority opted to keep rates steady at 4.75%. However, signals were given that rate cuts would likely continue next year.
Due to stronger-than-expected wage growth and persistent inflation, the BoE was expected to adopt a more cautious approach next year. Yet, the bank's dovish stance was more pronounced compared to the Fed. Swap market data shows traders are now pricing in two quarter-point cuts with high certainty and assigning some probability to a third.
As expectations for Fed cuts diminish while BoE cuts increase, the pound may face continued pressure against the dollar.
Finally, early Friday, the People's Bank of China (PBoC) left its one-year loan prime rate unchanged at 3.1%, while the five-year rate remained at 3.6%. However, market expectations are rising for deeper rate cuts next year to support the struggling economy. This anticipation has driven China's one-year bond yields to 1% their lowest level since the global financial crisis.
Economists warn that amid trade uncertainties, concerns over the divergence between U.S. and Chinese monetary policy could lead to further depreciation of the yuan. Still, policymakers may be forced to accept some currency devaluation as they pursue additional stimulus measures to accelerate economic recovery and boost domestic demand.