US equity markets fell in the wake of the Federal Reserve’s latest meeting, at which it cut interest rates by 25 basis points.
The Fed Funds Rate now sits at a target range of 4.25% to 4.5%.
The central bank lowered expectations for further rate cuts next year, forecasting just two cuts in 2025 after higher than expected inflation prints in September and October.
The S&P500 closed the day down 2.95% following the announcement.
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“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing. Reflecting recent stronger data, changes to the FOMC’s inflation and unemployment forecasts were hawkish and the dot-plot now sees just two cuts in 2025,” said Whitney Watson, co-CIO and co-head fixed income and liquidity solutions at Goldman Sachs Asset Management.
“We expect the Fed to opt to skip a January rate cut, before resuming its easing cycle in March.”
Though the 25bps cut was expected, Salman Ahmed, global head of macro & strategic asset allocation at Fidelity International, said there remains a considerable amount of uncertainty about the economy and the policy path over the coming months as incoming president Donald Trump prepares to take office.
“Powell noted that committee members varied in their incorporation of potential Trump policies in their projections, with some citing increased uncertainty in their dot plot assessments. As he put it, ‘when the path is uncertain, you go a little slower.’
“He also indicated the Fed stands ready to carefully assess policy responses once specific implementation details of proposed tariffs become clear.
“The Fed’s outlook now broadly aligns with our own expectations for 2025 and we will watch reflation (our current base case) as well as stagflation risks closely. We think odds for renewed rate hikes in the latter part of next year are rising.”
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Matthew Morgan, head of fixed income at Jupiter Asset Management, said that the revised expectations for the cutting cycle is perhaps not surprising given consumer spending, policy uncertainty, and jobs looking in decent health.
“However, we think we are likely to see rate cut expectations increase next year as growth softens. The labour market is clearly cooling, inflation is softening, and Europe and China are a drag on global growth.
“Given the high inflation of the Biden presidency was very unpopular with the public, we think Trump will be wary of overdoing inflationary policies, like tariffs. Together with potential government spending cuts in the US, next year could well see positive conditions for the performance of government bonds.”
