Greetings from Northern Michigan, where, after three-plus decades of skiing, I’m trying to teach myself how to snowboard. Now, before anyone says, “Why on earth would you do that?” know that it is the option of last resort. I’ll spare you the details, but due to a lingering foot issue, ski boots have become quite painful, and snowboarding is the best option to get out on the slopes with my kids. And while I knew it wouldn’t be easy, after a day of struggles, I hope to make significant progress tomorrow. But enough about my weekend plans; let’s look at how Jerome Powell did his best to impersonate the Grinch.
Now, on to the biggest news of the week. Jerome Powell and the FOMC decided to cut rates by 1/4 point to a target range of 4.25% to 4.5%. If that doesn’t sound like earth-shattering news, you’d be correct. The rate cut was just what market participants expected. Nevertheless, markets reacted horribly, dropping 3% on Wednesday. So, what caused the dramatic reaction? It was the Grinch (a.k.a. Jerome Powell) stealing next year’s rate cuts.
Powell played the Grinch not because of this week’s modest rate cut—after all, markets had already priced that in—but because of the Fed’s tone regarding the outlook for 2025. While Powell emphasized progress on inflation and the labor market, he hinted at a cautious, slow approach to further rate cuts, deflating hopes for a more accommodative stance.
“We are at or near a point at which it will be appropriate to slow the pace of further adjustments,” Powell said, emphasizing that the Fed is moving cautiously to ensure inflation continues trending toward its 2% target. This statement alone sent shivers down the market’s spine. The perception of slower cuts clashed with market expectations for quicker relief in the new year.
Furthermore, Powell addressed why the Fed has been reluctant to cut more aggressively, highlighting the delicate balance between fostering growth and avoiding an inflationary relapse. “We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment,” he explained. The Fed, it seems, is walking a tightrope, and Powell made it clear there’s no “preset course.”
Adding to the cautious tone, the Fed’s Summary of Economic Projections (SEP) suggested that the federal funds rate would likely remain higher for longer than markets anticipated. Powell highlighted projections for a median rate of 3.9% by the end of next year and 3.4% by the end of 2026—both 1/2 point higher than prior projections.
The real sting came when Powell tempered any optimism about a quick descent to lower rates. He explained, “The economy is in a really good place, and policy is in a really good place. But we think it’s appropriate to move cautiously and look for progress on inflation.”
Moreover, markets were rattled by Powell’s specific dialogue on inflation. Despite progress, with inflation down from a peak of 5.6% to 2.8% for core PCE, Powell emphasized the Fed’s commitment to its 2% target, saying, “We have made a great deal of progress, but we’re not going to settle for 2.5%.” For those hoping the Fed might pivot to accepting a marginally higher inflation target, this was the ultimate holiday letdown.
In short, Powell’s Grinch moment wasn’t the rate cut itself but the cautious, uncertain tone about the path forward. Like a reluctant Santa, he handed out a modest gift this year but made it clear that next year’s presents will be delivered with care—and only if economic conditions allow.
Markets / Economy
- Markets felt the shockwaves from the FOMC meeting, with the S&P down -2.0%, the Nasdaq down -1.8%, and the small-cap Russell 2000 down -4.5%.
- Core PCE increased 0.1% MoM in November, the least in six months, compared to a 0.3% increase in October and September.
- On an annual basis, Core PCE inflation unexpectedly steadied at 2.8%, while forecasts were pointing to a rise to 2.9%.
- Retail sales increased 0.7% MoM in November following an upwardly revised 0.5% rise in October and above forecasts of 0.5%. The data continued to point to robust consumer spending during the holiday shopping season.
- The U.S. economy expanded an annualized 3.1% in the third quarter of 2024, higher than 2.8% in the second estimate and above 3% in Q2.
Stocks
- U.S. equities were in negative territory. Energy and Real Estate led the decline, while Technology and Utilities outperformed. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 13 basis points to 4.52% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
