The Federal Reserve has executed what analysts at ABN AMRO term "conviction cuts," representing a decisive shift in monetary policy that has triggered a strongly dovish reaction across global financial markets. This move marks a significant evolution in post-pandemic economic management, with the central bank reducing the federal funds rate by 50 basis points during its March meeting and signaling potential additional easing throughout 2025.
According to ABN AMRO's analysis, this is the most assertive rate-cutting cycle since the 2020 pandemic response, but it differs fundamentally as it emerges from achieved economic targets rather than crisis conditions. The decision follows six consecutive months of inflation within the Fed's 2% target range and unemployment stabilized at 4.1% for three quarters, providing what analysts call the foundation for "preemptive normalization." The central bank aims to avoid overtightening as economic growth moderates, seeking to sustain the current expansion while managing downside risks.
Market expectations leading up to the decision had been cautious, with pricing on the forecasting platform Polymarket showing a 96% probability of no change in interest rates at the March meeting just prior to the announcement. Only a 2% probability was priced in for a 25 basis point cut, and a mere 1% for a 50 basis point or more reduction. This highlights how the Fed's decisive action surprised many market participants.
The immediate market reaction was pronounced: the S&P 500 rallied 2.3%, Treasury yields declined across the curve with the 10-year yield dropping 15 basis points to 3.25%, and the dollar index weakened 1.8% against major currencies. Bitcoin saw a moderate gain of 3.2%. Credit spreads tightened significantly in both investment-grade and high-yield corporate bonds, and volatility indices declined substantially, with the VIX falling below 15 for the first time in eight months.
Market-implied probabilities now suggest expectations for three additional 25-basis-point cuts in 2025, up from previous anticipations of only one or two reductions. This repricing reflects growing confidence in the Federal Reserve's commitment to supportive policy.
The policy shift comes despite recent cautious statements from Fed officials. Austan Goolsbee, a voting member of the Fed, had stated just before the decision that an interest rate cut would not be appropriate in the near future without more evidence of a sustained decline in inflation. In a prepared speech for the National Association of Business Economics' annual conference, Goolsbee said further interest rate cuts this year could be possible only if concrete progress is seen toward inflation being on a sustained path toward the 2% target.
ABN AMRO's "Policy Conviction Index" measuring the certainty behind monetary decisions has reached its highest level since 2019, indicating unusual coherence between the Fed's actions and forward guidance. Historical analysis reveals important distinctions from the 2019 "mid-cycle adjustment," which involved three rate cuts amid trade tensions that policymakers described as insurance rather than conviction.
The Federal Reserve's balanced approach now aims to extend the economic expansion while managing emerging risks proactively, with market participants monitoring subsequent meetings for consistency in this new conviction-based framework.
