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Fed Cuts Rates; Stance On Easing Clatters Stocks - Reactions
Editorial Staff
20 December 2024
The US Federal Reserve’s Open Market Committee voted this week by 11 to 12 in favour of cutting the central bank’s main interest rate to a range between 4.25 per cent and 4.5 per cent, the lowest in two years, and the third cut in a row. Preston Caldwell, chief US economist at Morningstar There is much uncertainty about precisely where the neutral rate is located. GDP growth has remained strong despite the Fed’s high interest rates. Inflation is also not quite back to target. The Fed is virtually certain to slow the pace of rate cuts in 2025, in order to better gauge the effects of monetary policy in real time. Rick Rieder, BlackRock chief investment officer of Global Fixed Income
US stocks fell on Wednesday; the Dow Jones Industrial Average sank by 1,100 points yesterday in reaction to comments from Fed chairman Jerome Powell that suggested the room for further reductions is limited. Other indices fell. The fact that markets responded in this way may be a sign of how equity valuations may be in part dependent on views of further easing, which is not particularly reassuring. The Fed may note that, with tariff hikes coming under a Trump presidency, and domestic measures to boost growth, that there could be some inflationary impact. What seems clear is that a return to near the ultra-low rates post-2008 is not likely. (Editor’s note: that is a good thing.)
Here are reactions from wealth and asset managers:
The Fed is setting the stage for the possibility of few (or even zero) additional rate cuts in 2025 and 2026. Fed Chair Jerome Powell noted that the federal-funds rate is now “significantly closer to neutral”, although it likely remains still “meaningfully restrictive.”
"The Fed didn’t noticeably increase its GDP forecast, so expectations of higher inflation can’t be attributable to expectations of a hotter economy. Instead, it is likely that the Fed is beginning to incorporate the possibility of inflation-boosting policy changes in 2025, most notably higher tariffs.
Although market expectations were already more hawkish than the Fed going into today’s meeting, the upward revision in the Fed’s expected federal-funds rate for end-2025 compelled an upward revision in the market’s own expectations. The market is now even incorporating a 60 per cent probability that the federal-funds rate target range is at 4.25-4.50 per cent or higher at the end of 2025, meaning no net rate cuts in 2025.
To us, this suggests that we’ve entered a new phase of the rate cutting cycle. In fact, we now enter a period that may be quite different than the prior couple of quarters. This is because the Fed has rightly reduced the Funds Rate down to the 4ish per cent level, which still may be moderately restrictive, but is also much more in line with an inflation rate that is running in the low-to-mid 2 per centish range today, by many measures. We have often argued that the more elevated being stuck at 0.3 per cent for four months in a row while GDP growth has remained strong.