Why the stock market was so disappointed by the Fed Wednesday
The Federal Reserve gave the market what it wanted Wednesday, but investors found themselves still disappointed by the move. The central bank cut interest rates by a quarter point, bringing the target range to 4.25% to 4.5%. But investors were more concerned with what the Fed projected in its forecast for 2025. The Fed indicated in its “dot plot,” a gauge of policymakers’ future expectations, that it will lower rates just twice more in 2025, down from the four quarter-point cuts the central bank pointed to back in September. That hawkish forecast distressed investors, who worry that sticky inflation above the Fed’s 2% target coupled with solid economic growth will mean fewer rate cuts next year — or even force the Fed to tighten again at some point. Stocks tumbled following the decision, with the Dow Jones Industrial Average down more than 1,100 points and falling a 10th straight day for the first time since 1974. In percentage terms the Dow actually outperformed, with the broader S & P 500 and Nasdaq Composite slumping 3.0% and 3.6%, respectively. Here is what some market observers had to say about the Federakl Reserve decision. David Russell, global head of market strategy at TradeStation: “Good-bye punch bowl. No Christmas cheer from the Fed. Policymakers see higher inflation and lower unemployment in 2024. There is simply no reason to be dovish given that outlook. The easy lifting is done now that rates are no longer clearly restrictive. It’s a logical time to pause. The Fed has engineered a soft landing and now they’re taking off the training wheels. Let’s see if the economy can stand upright or falls over. Attention now shifts from monetary policy to the fiscal policies of the incoming Administration. The economy is now in Trump’s hands, for better or worse.” Steve Wyett, chief investment strategist at BOK Financial: “Nuanced. This is the only way to describe what the Fed is doing now. The path to their 2% inflation goal was lengthened as expected rate cuts this year and next were reduced. Unemployment is stable at current levels and [the] GDP forecast raised this year while stable in 2025 and 2026. There seems to be a sense from the Fed that they are still too restrictive which puts the employment market at risk while the idea of continued economic growth means they think they should slow down. The question of where ‘neutral’ actually is, remains an open question.” Byron Anderson, head of fixed income at Laffer Tengler Investments: “This Federal Reserve with Powell has been the helicopter parent of the economy. Since the Fed has started its cutting cycle 10-year yields are 85bps higher and continuing to climb today. The soft landing has been achieved; take the win already. Inflation has plateaued well above goal; unemployment has plateaued and yet the Fed keeps cutting rates. My question is which of its dual mandates is it protecting the economy from by cutting? It feels like markets are telling the Fed that something isn’t correct in their thinking, but the Fed continues to pick at the edges. The time to pause was after Trump won the election and wait to see what the implications of his administration will be. There is going to be change and volatility with Trump and the Fed may well have to about face again and lose credibility with markets.” Seema Shah, chief global strategist at Principal Asset Management: “The decision to cut rates today is not a surprise in itself. But, in light of the significant revisions to the projections, it does suggest that this was a reluctant reduction – one designed to give markets a bit of comfort as the Fed lays the groundwork for a more hawkish approach to policy in 2025.” Jack McIntyre, portfolio manager at Brandywine Global: “When you include the forward guidance components, it was a ‘hawkish cut.’ Stronger expected growth married with higher anticipated inflation—it’s no wonder the Fed reduced the number of expected rate cuts in 2025. The results of this meeting raise the question: if the market wasn’t expecting a rate cut today, would the Fed actually have delivered one? I suspect not. Not surprisingly, there was a dissenter. Thus, the Fed has entered a new phase of monetary policy, the pause phase. The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025.” Markets were last pricing in a roughly 38% likelihood the target rate will end 2025 in the 4.00% to 4.25% range, according to the CME FedWatch Tool.
