Fed Forecast for Fewer Cuts in 2025 Roils Markets

The Federal Reserve’s rate cut and hawkish 2025 forecast spurred a sharp market selloff, while softer PCE inflation data and bipartisan legislation to avert a government shutdown capped a volatile week marked by economic resilience and political uncertainty.

On Wednesday, December 18, the Federal Reserve announced its third and final interest rate cut of the year, lowering the benchmark rate to a range of 4.25%- 4.50%.[1] The Fed also revised its 2025 forecast, projecting only two rate cuts instead of the previously expected four due to ongoing inflation and the resilience of the US economy.[2]

The prospect of fewer rate cuts led to a market selloff, with the S&P 500 dropping 2.9% and the NASDAQ falling 3.6%, marking their worst single-day losses in four months. The Dow Jones Industrial Average fell over 1,100 points (2.6%), extending its record-breaking losing streak to 10 consecutive sessions, the longest since 1974, before narrowly snapping the streak on Thursday.[3] [4] Despite Wednesday’s volatility, the S&P 500 (up 26.03% year to date) remains poised for one of its strongest annual performances.[5]

Treasury yields surged following the Fed’s incremental commentary surrounding sticky inflation.

Following the Fed’s more hawkish tone, the 10-year Treasury yield jumped 4.5% on Wednesday, its highest level since May.[6]

On Thursday, the Labor Department reported that initial jobless claims fell 22,000 to 220,000 for the week ending December 14. The result was modestly shy of the 230,000 expected.[7] Meanwhile, third-quarter GDP grew 3.1%, surpassing expectations by 0.3 percentage points.[8]

On Friday, the Commerce Department released November’s Personal Consumption Expenditure (PCE) price index, which rose 2.4% year over year, modestly below the 2.5% expected. The Fed’s preferred inflation metric, core PCE (excluding food and energy costs), rose 2.8% year over year versus the 2.9% consensus.[9] Softer PCE data eased the investor sentiment headwind associated with the Fed’s curtailed plans surrounding future rate cuts. Chicago Federal Reserve President Goolsbee indicated interest rates could still decrease a “fair amount” over the next 12 to 18 months.[10] In response to the PCE data and Goolsbee’s comments, the 10-year Treasury yield fell 0.04 points (to 4.53%) while the S&P500 climbed 1.09%.[11]

On Saturday, President Biden signed a bipartisan bill to avert a government shutdown, extending funding through March 14, 2025. The legislation, approved by the Senate and the House, includes $100 billion for disaster relief and $10 billion in aid for farmers but excludes debt ceiling provisions. The bill capped a turbulent week in Washington, marked by opposition from President-elect Trump and other Republicans to earlier proposals. Speaker Mike Johnson ultimately secured passage with a pared-down version, emphasizing it as a temporary measure ahead of Republican control of Congress and the White House in January.[12]

[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20241218a.htm

[2] https://apnews.com/article/federal-reserve-inflation-loan-rates-economy-prices-7474747d890c0fdcc87454fd4c80aaa4

[3] https://apnews.com/article/stocks-markets-rates-nissan-2b868351d485db56e9c80f520c97b595

[4] https://www.cnbc.com/2024/12/18/stock-market-today-live-updates.html

[5] https://apnews.com/article/sp-stocks-wall-street-records-c144fbee69be7fff59c2e4b945b0c393

[6] Source: Fact Set

[7] Source: US Labor Department

[8] https://www.reuters.com/markets/us/us-weekly-jobless-claims-fall-more-than-expected-2024-12-19/

[9] Source: US Department of Commerce

[10] https://www.reuters.com/markets/us/feds-goolsbee-says-policy-uncertainty-led-his-shift-rate-cut-path-2024-12-20/

[11] Source: The Wall Street Journal

[12] https://www.cbsnews.com/news/government-shutdown-congress-trump-elon-musk/