As we approach the week from December 16 to December 22, 2024, the global financial markets are poised for a series of significant events, especially with the imminent meeting of the Federal ReserveThis gathering marks the last meeting of the Federal Open Market Committee (FOMC) for the year, setting the stage for important insights into the future of monetary policy.

On December 18, Federal Reserve Chair Jerome Powell will announce the results of their deliberationsCurrent market predictions point to over an 80% likelihood of a rate cut by 25 basis points, essentially making this outcome widely expectedThe atmosphere of anticipation hangs heavily over traders and investors, who are keenly aware that any deviation from this anticipated path could trigger a ripple effect across various markets.

But beyond the expected rate cut, there are additional factors to consider

First, we must watch for any surprises that could emerge from the meeting.

Although the probability of a 25 basis point cut is high, the nature of financial markets is such that we can never discount the possibility of an unexpected announcementIf the Fed were to remain steadfast and choose not to cut rates, the markets would likely react sharplySuch an unexpected move could destabilize the global capital markets, shaking the confidence of investors who have banked on a different outcome.

Thus, while a rate cut seems almost certain, the potential for surprises always loomsTherefore, investors will be keeping a close watch on the developments that emerge from the meeting.

Additionally, attention should be directed toward the Fed's projections regarding future rate cutsThe transition from a tight monetary stance to a looser one has been taking place, and this upcoming cut would signify the third reduction in interest rates this year alone, decreasing the federal funds rate from its peak of 5.5% to 4.5%. However, it's crucial for stakeholders to assess not only the immediate implications but also the Fed’s forecast regarding rate cuts in 2025 and 2026.

Following this meeting, the Fed is expected to release its dot plot, which provides insights into the expectations of various FOMC members regarding the future trajectory of interest rates

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Such data is key, as it equips investors with a roadmap to gauge the potential evolution of monetary policy in the upcoming yearsShort-term market dynamics could shift dramatically based on the sentiment projected through the dot plot, prompting participants to recalibrate their investment strategies accordingly.

In parallel to these developments in the United States, another significant event concerns the People’s Bank of China (PBOC). Statements from high-ranking officials at the central bank, including Governor Pan Gongsheng, hint at potential easing measures to come.

Earlier in October, during the 2024 Financial Street Forum, Pan disclosed plans to lower the reserve requirement ratio (RRR) by 0.5 percentage points on September 27. With indications that further cuts might be on the horizon, discussions around a potential additional reduction of 0.25 to 0.5 percentage points by the end of the year have fueled speculation.

Moreover, on December 14, another senior official, Wang Xin, reiterated that there is still room for further reductions, as the average RRR currently stands at 6.6%. The unambiguous communication from the PBOC's leadership illustrates a commitment to optimizing liquidity conditions, especially in the face of forthcoming economic data releases and the MLF maturity next week.

Given that these officials have distinctly articulated their intentions, the market is now bracing for potential action before the year wraps up

Analysts will be keeping a close eye on upcoming economic indices as well as housing data that the National Bureau of Statistics is expected to announce, anticipating whether the PBOC follows through with previously hinted easing measures.

Thus, while the Federal Reserve is undoubtedly a focal point, the market's attention may be shifting more significantly towards the PBOC's decisions, waiting to see if the long-anticipated RRR adjustments materialize.

Both the Fed's expected rate cut and the PBOC's potential RRR reduction seem to point toward a common goal—facilitating monetary easingThis year may merely represent the initial phases of a larger trend as both China and the U.S., two of the world’s largest economies, are likely to maintain more accommodating monetary policies moving forward.

Stock markets, in essence, are largely driven by monetary factors

Monetary easing, by more swiftly pushing asset prices upward, can ignite market sentiment, drawing in additional investment and thereby generating a positive feedback loop to further elevate stock prices.

In the context of this week’s trading in the A-shares, there appeared to be volatility, with significant sell-offs on Friday causing the week to close lower; many investors saw their gains evaporate in the wake of market correctionsThe forthcoming pivotal decisions from the central banks of both countries could signal an inflection point for the A-share marketObserving these upcoming announcements will be critical in determining the direction of market sentiment.

For those already invested, the advice is to stay the courseHolding onto current positions until after both the Federal Reserve's rate cut and the PBOC's RRR reduction happens could be the prudent approach, as clarity will emerge in the wake of these decisions.