The Federal Reserve cut the Fed Funds Rate by another quarter point yesterday, and yet markets tanked anyway with stocks suffering their largest “Fed Day” sell-off since March 2020. It turns out that Chair Powell and the rest of his colleagues on the Federal Open Market Committee (FOMC) are in a far less giving mood this holiday season than previously thought – their forward projections now show only two additional rate cuts in 2025, down from four following the September meeting. In addition, the committee signaled a renewed sense of concern about upside risks to inflation after further downward progress stalled recently. That was enough to send markets spiraling, with both stocks and bonds selling off, while bond yields and the dollar jumped.
The FOMC had previously signaled that the closer they get to the estimated “neutral rate,” they can slow the pace of rate cuts as they try to calibrate to what that level actually is. There’s a risk of both overshooting and undershooting, so after a full 1% reduction in the policy rate since September, they want to proceed more cautiously in reducing rates from here. Making their jobs even harder at this juncture is the uncertainty related to the impact on both growth and inflation of potential policy changes by the incoming Trump administration in the form of tax cuts, tariffs, etc. While Powell tried to dance around answering questions about that directly, he did acknowledge that some members on the committee attempted to incorporate it in their forecasts.
Our initial assessment of yesterday’s selloff is that it seems like an overreaction in a market that was vulnerable to any hint of disappointment. Bigger picture, we don’t think this significantly changes the view from 30,000 feet: the US economy is still in mostly good shape with GDP growth clocking in around 2.5-3%, corporate earnings are poised to continue growing next year, and the Fed is still gradually lowering rates, even if it’s at a slower pace and by less in aggregate than previous expectations. Those are ingredients for further market gains, although it might be a bumpier ride with elevated policy uncertainty at the moment.
Source: Yardeni Research, as of 12/18/24
Source: Bloomberg, as of 12/18/24
Carl Noble, CFA
Senior Vice President of Investments
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