This morning, we did get some data on the economy, but all of those reports are taking a backseat to the latest Federal Reserve monetary policy decision, which came at 2:00 P.M. (EST) yesterday. The Federal Open Market Committee (FOMC) made its final monetary decision of 2024 by cutting the federal funds rate by a quarter point, to 4.25%-4.50%. That marked the third-consecutive reduction, bringing the benchmark short-term interest rate down by a full percentage point this year. The rate reduction was not unexpected, but the central bank struck a more-hawkish tone than Wall Street was anticipating, cutting its projection for rate cuts in 2025 from four to two. The more-cautious stance was likely prompted by the sticky inflation readings this fall, which showed a modest uptick in the pace of price growth.
Treasury market yields spiked on the more-hawkish Federal Reserve statement, with the rate on the 10-year Treasury note topping the 4.50% mark this morning. It should be noted that since the Fed began cutting interest rates on September 18th, the yield on the benchmark Treasury note, which has an impact on longer-term lending rates, has risen by more than 80 basis points based in part on less encouraging inflation trends The major equity indexes, which were little changed heading into the Fed’s decision, took a significant move lower on the likelihood that the lead bank will be less accommodative than once expected.
The Dow Jones Industrial Average, the technology-heavy NASDAQ Composite, and the broader S&P 500 Index fell 2.6%, 3.6%, and 3.0%, respectively, yesterday. The Dow 30 is on its longest losing streak (10 consecutive down sessions) since 1974. It also is worth noting that the CBOE Volatility Index (or VIX), also known as the “fear gauge,” spiked 43% during yesterday’s session, indicating some growing skittishness among investors about a change in the expected 2025 course of Federal Reserve policy. The looming possibility of a shutdown tomorrow if lawmakers can’t reach a deal to fund the government also is adding to nervousness on Wall Street. Nevertheless, the equity futures are pointing to a modest retracing of yesterday’s losses when trading kicks off stateside today.
From a sector perspective, the interest-sensitive groups, including utilities, financial, and real estate, have performed poorly in recent trading sessions, as sentiment built that the lead bank will likely not be as aggressive on the rate-cutting front. Year to date, the construction and transportation stocks have significantly underperformed the broader S&P 500 Index. The more interest-rate sensitive small-cap stocks led the market notably lower yesterday, with the small-cap Russell 2000 falling 4.4% during the highly bearish session. The technology stocks, which have performed well the last two months, lost some starch yesterday on the possibility of rates staying higher than expected next year. The stock market may have to reprice some of the stocks that saw a run-up in their price-to-earnings multiples on the expectation that interest rates would be notably lower next year. Many of these stocks are in the higher-growth arenas.
Overall, the FOMC is looking to strike a balance with regard to rate cuts next year. (The committee increased the neutral rate forecast from 2.9% in September, to 3.1% yesterday.) It noted that there are risks on both sides of its dual mandate to promote price stability and foster full employment. That is probably why it will likely lower rates at a more-measured pace in 2025. It doesn’t want to be too aggressive and risk a reacceleration in inflation, but it also wants to not keep interest rates too high and risk hurting the labor market, which could lead to a slowdown in the pace of economic growth. Fed Chairman Jerome Powell did note the extensive progress the bank has made the last few years on slowing the rate of inflation. However, the change in the White House on January 20th and President-elect Trump’s promise to bring more pro-growth policies, including tax cuts, could put some upward pressure on prices. On a positive note, Chairman Powell did say that the Federal Reserve can be more cautious on the interest-rate front because the economy is performing at a better level than most economists predicted at this stage of the upcycle. Mr. Powell said that the economy is performing “substantially better” than its global peer group.
On the economic front, we received the second—and final revision—to the third-quarter gross domestic product (GDP) estimate. The Commerce Department reported that GDP expanded at an annualized rate of 3.1% in the September quarter, which was higher than last month’s reading of 2.8%. The Federal Reserve said that the economy is currently advancing at a solid pace, but did lower its GDP forecasts for both 2025 and 2026. The central bank now estimates an annualized GDP advance of 2.1% next year, down from its previous call of 2.5%.
Meanwhile, we learned that initial unemployment claims for the week ending December 14th totaled 220,000, which was down 22,000 from the previous month’s figure. Chairman Jerome Powell said that the labor market cooled from its overheated state of a few years ago, but still remains relatively tight. A half-hour into today’s session we will get the latest reading on existing home sales.
On the corporate front, Micron Technology (MU) beat expectations on both the top and bottom lines during the latest quarter, fueled by growth in data center revenue. However, the stock is down sharply in extended-hours trading, as the semiconductor company delivered near-term guidance that failed to excite investors. Conversely, shares of Darden Restaurants (DRI) are up after the restaurant operator posted in-line quarterly results and issued upbeat guidance. - William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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