Source: Wall Street Insights
Fed Officials Deliver Third Straight Rate Cut, Signal Renewed Inflation Concerns as 2024 Comes to a Close
Federal Reserve Chair Jerome Powell made it clear: the central bank’s year-end inflation forecast has “taken a hit.”
Officials now believe it will take longer to bring inflation down to the 2% target they’ve been missing for nearly four years. As a result, they’ve lowered their rate-cut expectations for next year, with Powell emphasizing that any adjustments will depend on further signs of easing price pressures.
“At the point where we consider further rate cuts, we’ll be looking closely at progress on inflation,” Powell said during Wednesday’s press conference. “The 12-month inflation rate has been somewhat volatile.”
Currently, policymakers expect a median rate reduction of just half a percentage point next year—only half of what they projected in September.
The market reacted sharply to the Fed’s updated policy outlook. U.S. Treasury yields and stocks plunged, while the dollar surged to its highest level in more than two years.
The Fed Took Expected Action, But Markets Sold Off Risk Assets Anyway
On Wednesday, the Federal Reserve took steps in line with market expectations. Yet, that didn’t stop investors from dumping riskier assets in large numbers.
The Fed announced a quarter-point rate cut, marking its third consecutive reduction. However, Fed Chair Jerome Powell indicated that further rate cuts might pause as long as inflation remains above the 2% target. Following this announcement, the stock market experienced a sharp late-day sell-off.
The S&P 500, which had risen slightly before the announcement, plunged 3%, marking its worst "Fed Day" since March 2020, when the Fed enacted emergency rate cuts over a weekend to address the pandemic. Fewer than 20 stocks in the benchmark closed higher. Small-cap stocks were hit hardest, with the Russell 2000 dropping 4.4%, its steepest decline since June 2022.
Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, commented: “The rate cut wasn’t a surprise. The market had already priced it in with nearly 100% certainty. But I think people are uneasy about the wording in the announcement—not just the data, but also upcoming policy decisions from the new administration.
“The market had been expecting two to three rate cuts next year, leaning toward three. Now, it seems like it will be fewer than two. Investors are processing things they probably should have already known but hadn’t fully digested yet. This reaction feels a bit overdone, almost reflexive. The market wasn’t shocked by signs pointing to just one rate cut next year, so this seems like an overreaction.”
Based on current market pricing, a “soft landing” for the U.S. economy remains the baseline scenario: the Federal Reserve is adeptly managing the economy by gradually easing restrictive interest rates at an appropriate pace, supporting economic stability while facilitating a decline in inflation and preemptive rate cuts for a “soft landing.”
In this context, equity risk assets are expected to perform well, particularly interest-sensitive sectors such as small-cap stocks, real estate REITs, and biotechnology. On one hand, a soft landing implies that economic growth remains robust. While market demand may decline, it is still at a healthy level, providing fundamental support for the performance of small-cap stocks. On the other hand, looser interest rate conditions will significantly alleviate financing pressures on smaller companies, thereby driving business expansion and valuation increases.
Furthermore, as the Fed enters a rate-cutting cycle, the dollar's siphoning effect on global liquidity is expected to gradually weaken. With capital flowing back, asset prices in emerging market countries such as Southeast Asia may experience some recovery.
Source: Tiger Investment Research Team
Disclaimer:
Not financial advice. Investment involves risk. The price of investment instruments can and do fluctuate, and any individual instrument may experience upward or downward movements, and under certain circumstances may even become valueless. Past performance is not a guarantee of future results. This advertisement has not been reviewed by the Monetary Authority of Singapore.