The Federal Reserve cut the federal funds rate by 0.25% at its December 18 FOMC meeting. This marked the third consecutive rate reduction following a quarter percent cut in November and half a percent at the September decision.
However, markets did not take the rate cut in its stride and reacted negatively. So, why did the market fall after the Fed cut rates by 25 bps on December 18?
“Santa came early and dropped a 25-bps rate cut in the market’s stocking but accompanied it with a note saying there would be coal next year. The market is forward-looking, ignoring the good news of today’s rate cut and instead focusing on the paucity of rate cuts for next year. Currently, there are 2 cuts priced in for 2025,” says Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
The US Fed’s expected 25 basis point reduction in benchmark rates, resulted in a negative market reaction. The FOMC’s 25bp cut has caused market turmoil, with the S&P experiencing its worst ‘Fed Day’ performance in over four years. The leading indices S&P 500 shed 2.95% while the Nasdaq 100 crashed 3.6% after Powell’s statements.
Tesla closed lower by 8.28%, Zscaler by 7.36%, Paycom Software by 10%, CrowdStrike Holdings by 7.24%, Broadcom by 6.91% and DoorDash by 6.56% amongst some major losers.
“Fed’s hawkish stance of reducing the number of rate cuts from previously-anticipated four times to twice next year due to low unemployment rate and sticky inflation may have put investors on edge,” says Subho Moulik, founder & CEO, Appreciate.
The US Fed has cut rates by 100 bps in 2024 as inflation trended downwards and the economy looked stable. However, Powell and the team do not look confident regarding inflation and the economy in 2025.
“The indication of only two rate cuts in 2025, down from the previously expected four, has negatively surprised the markets. The combination of resilient economic growth in the U.S., persistent inflation which remains above the Fed’s target of 2% and policy uncertainty under the incoming Trump administration has led to this cautious guidance from the FED. As a result, markets are reacting to the implications of a slower pace of rate cuts going forward,” says Raghvendra Nath, MD, Ladderup Wealth.
Powell’s hawkish remarks in the December FOMC meeting seem to point towards several pauses and fewer rate cuts in 2025. “The updated ‘dot plot’ showed a median expectation of just 50bp of further rate cuts next year, half the magnitude foreseen in the September forecast, while also nudging the longer-run rate estimate higher to 3.00%, suggesting a shallower easing cycle than previously expected,” says Michael Brown Senior Research Strategist at Pepperstone.
Trump favours a lower rate regime and Powell’s hawkishness may work against his policies. However, not much can change in 2025. “There’s not much the Trump administration can do to force the Fed to loosen rates faster in the near term, but that could change in 2026 if President-elect Trump gets the Senate to confirm a new Fed chair who is more sympathetic to his policy goals,” says Bill Adams, Chief Economist for Comerica Bank.
US Fed’s statement reads (excerpts) – Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
