The Federal Reserve cut its key interest rate for a third-straight meeting and penciled in two more rate cuts for 2025. The Fed meeting reveal was pretty much exactly what Wall Street expected, yet the S&P 500 turned sharply lower in Wednesday afternoon stock market action.
The Fed projections would see the federal funds rate cut to just below 4% next year, implying some modest additional relief from high rates for borrowers. However, markets continued to slide as Fed Chairman Jerome Powell spoke.
Most of what Powell said should have been soothing to markets, but one line stood out. Powell said that “policy uncertainty” relating to President-elect Trump’s plans for tax cuts, tariffs and an immigration crackdown, provides another reason for the Fed to move slowly in further cutting rates.
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This Is How A New President Will Impact Fed Rate Cuts In 2025
3:15 p.m. ET
No More Rate Cuts Until May?
The bond market has reacted negatively, possibly to Powell’s talk about moving slowly amid policy uncertainty. Odds of a January rate cut have fallen to 9%, while odds of a March 19 rate cut are now below 50%. Even for the May 7 meeting, odds of a rate cut have shrunk to just above 50%.
The upshot is that markets now see the Fed on hold until at least May, and maybe June.
“From here, it’s a new phase, and we’re going to be cautious about further cuts,” Powell said.
3:10 p.m. ET
Why The S&P 500 Sold Off On The Fed
There are two ways to interpret S&P 500 and broader market weakness. This could be a sell-the-news effect, since the Fed did exactly what was expected. Nothing Powell said should be a concern for investors. The only possible negative is that the Fed isn’t factoring in pro-growth tax and regulation policies from the incoming Trump administration, while Wall Street may see a continuation of solid economic growth ahead.
3:07 p.m. ET
Powell Sticks To Fed Script On Markets
One thing Powell isn’t talking about is easy financial conditions, which can sometimes be interpreted as a shot across the bow of the S&P 500.
2:59 p.m. ET
Powell Upbeat On Economy
Is the economic slowdown finally coming? “The outlook is pretty bright,” Powell said. He noted that economists have been predicting a slowdown for a long time, really for the past couple of years. Fed projections see more moderate 2.1% growth next year and 2% in 2026, but Fed projections have been too pessimistic about growth for a while.
A year ago, the Fed thought GDP would grow 1.4% in 2024, but just revised that up to 2.5%.
That suggests Fed projections about further rate cuts have a smaller margin of error. If the economy outperforms, still-elevated inflation will keep the Fed on guard, barring labor market weakness.
2:57 p.m. ET
Market Sell-Off Continues
The S&P 500 is now down 1.3%, clearly falling below its 21-day line and undercutting the 6,000 level. The 10-year Treasury yield is now at 4.49%, just below the Nov. 15 peak of 4.505%. The U.S. dollar is soaring.
2:55 p.m. ET
Fed Awaits Policy Clarity
Is this the last rate cut for some time, Powell was asked. “We’re trying to make sensible policy as we go,” he said. He again addressed policy uncertainty. “We’ll have a much better idea” of where policy will go when policy becomes clear.
2:51 p.m. ET
Powell Touches On Trump Policies, Tariffs
Powell is addressing President-elect Trump’s policies. He said some members factored in possible policies into their economic projections, while others didn’t. He added that policy uncertainty is another reason for the Fed to go slowly. That’s a potentially big deal too. It leans against another cut to start the year.
Powell is talking about tariffs, including a 2018 analysis that suggested policymakers could look through a one-time rise in prices related to tariffs.
The Fed rate-setting committee has “done a good bit of work” in trying to understand what might be an appropriate policy response to tariffs, though that’s a question for another day, Powell said.
He called it “very premature” to draw any conclusions regarding tariffs. He added that “We don’t know” if the minimal inflationary effect of 2018-19 tariffs provides a good model for how they may affect prices in 2025 and later. That’s partly because the U.S. has just been through a period of high inflation, contrary to what was going on last decade.
2:44 p.m. ET
Stocks Hold Losses, Yields Keep Rising
The S&P 500 is down 0.8% as Powell speaks, about where it was just before he began speaking at 2:30 p.m. ET. The 10-year Treasury yield has now climbed to 4.47%.
Bitcoin fell back to about $103,500 as the dollar strengthened.
2:43 p.m. ET
Fed Pause In January?
Asked whether the Fed was likely to be on hold in January, Powell pointed to the slower pace of cuts in 2025.
The labor market is “clearly still cooling further,” though gradually, Powell said. “The job-finding rate is low.”
Powell’s labor-market view seems key. Until there is clear stability and maybe a modest firming of the labor market, the Fed isn’t going to show its hawkish talons, barring problematic inflation readings.
Notably, Powell said, probably more clearly than after November’s cut, that the Fed sees the neutral rate as below the current policy rate.
2:37 p.m. ET
Powell Notes Revised Rate Projection
“We’re not on any preset course” for future policy moves, Powell said, continuing its data-dependent approach.
Powell noted that the projected year-end federal funds rate for 2025 of 3.9% is 50 basis points higher than in September, consistent with slower progress on inflation.
2:34 p.m. ET
Powell Says Economy ‘Strong’
Powell calls the economy “strong” and the labor market “solid.” He mentioned 2.8% GDP growth in Q3. S&P Global expects that will be revised up to 3.2% after stronger services spending. Powell reiterated that the labor market isn’t a source of inflationary pressures, now that labor supply and demand are more in line.
“Our policy stance is significantly less restrictive,” Powell said.
2:31 p.m. ET
Powell Press Conference Starting
Fed chief Jerome Powell has started his press conference.
The S&P 500 is at session lows, down 0.8%. The 10-year Treasury yield is at 4.45%.
2:29 p.m. ET
The Neutral Fed Interest Rate
The projections show that Fed policymakers now see 3% as the long-term neutral federal funds rate, one percentage point above the target inflation rate. That moved up from 2.9% in September and 2.5% a year ago.
However, the neutral interest rate is a moving target. Deutsche Bank strategists think the neutral federal funds rate is around 4.3%, basically where its stands now after today’s rate cut.
2:24 p.m. ET
Fed QT Continues
The Fed meeting policy statement noted a continuation of balance-sheet runoff. Each month, the Fed is letting up to $25 billion in Treasury securities and $35 billion in government-backed mortgage securities run off its balance sheet as they mature, rather than reinvesting the sum.
However, Wall Street expects an update soon, with some bond market strategists seeing a wind-down or end to balance-sheet shrinkage in the first half of this year.
2:20 p.m. ET
Fed Taking Open Mind On Trump Policies
Reading between the lines, chair Powell is staying true to his word that the Fed won’t begin to factor in President-elect Trump’s agenda until after it becomes clear. That makes the Fed projections of marginal value. The projections don’t tend to be all that accurate anyway, even when fiscal policy, not to mention tariffs and a potential immigration crackdown, aren’t in doubt.
2:18 p.m. ET
Why The S&P 500 Isn’t Celebrating
If the Fed’s modestly downbeat growth and unemployment projections prove too pessimistic, policymakers may see less grounds for rate cuts.
2:15 p.m. ET
Fed Expects Slower GDP Growth
The Fed projections show 2.5% GDP growth in Q4 of this year vs. the year-ago quarter, with growth slowing to 2.1% next year. The unemployment rate is expected to average 4.2% in the current quarter, inching up to 4.3% by Q4 of 2025.
2:14 p.m. ET
Stocks Fall, Yields Pop
Despite a Fed rate cut and outlook that was in line with expectations, the S&P 500 fell 0.5%, after being up 0.2% before the Fed announcement.
The 10-year Treasury yield rose 7 basis points to 4.45%. That would approach the multimonth high of just over 4.5%.
2:10 p.m. ET
On Fed Dissent
Only one Fed official, Cleveland Fed President Beth Hammack, opposed today’s quarter-point rate cut. However, the Fed projections show that an additional three Fed policymakers who don’t currently have a vote, also opposed the move. That means 15 of 19 supported the rate cut.
For 2025, 15 Fed policymakers expect it will be appropriate to lower the federal funds rate by at least 50 basis points.
2:09 p.m. ET
Fed Expects Two Cuts, Little Inflation Progress
The Fed projections show 50 basis points in cuts in 2025, even as policymakers predict that the central bank’s primary inflation rate, the core PCE price index, will only fall to 2.5%.
The Fed is penciling in a further 50 basis points in cuts for 2026, when policymakers see core inflation easing to 2.2%.
Fed Chairman Powell
Fed Chairman Jerome Powell will take the podium at 2:30 p.m. and is expected to say that the economy is in good shape, so there’s no urgency for the Fed to cut again. However, his language could matter to markets. Powell could say that a rate cut at January’s Fed meeting is unlikely, if the economy proceeds roughly as expected. That might sink odds of a rate cut in January, or even in March.
Wall Street will also be keen to hear Powell’s take on where neutral is for the federal funds rate. The Fed is aiming to lower its key interest rate to the point where it is no longer restrictive, but doesn’t provide an extra impetus to economic growth either. Deutsche Bank economists wrote in a recent note that the Fed’s key rate may already be at neutral after a cut in December.
After a quarter-point cut at the Nov. 7 Fed meeting, Powell said of the neutral rate, “We’re pretty sure it’s below where we are now. But as we move further, there will be more uncertainty about where that is.”
Markets — and the reporters asking questions — also will want to hear how Powell is thinking about President-elect Donald Trump’s likely economic policies, including tariffs, tax cuts and tighter immigration.
The Case For A Long Fed Pause
At the moment, markets see slim odds of a further rate cut at the Jan. 29 Fed meeting, but odds are tilted to a cut at the March 19 meeting, 58% to 42%, according to CME Group’s FedWatch tool.
However, a good case has emerged for the Federal Reserve to go on an extended pause, potentially holding rates steady for all of next year.
The U.S. economy has grown at a very solid 2.7% pace over the past four quarters, which isn’t suggestive of monetary policy being much too tight. The Fed’s primary measure of core inflation, after dipping to 2.6% in June, has firmed up to 2.8%, well above the Fed’s 2% target.
A surging S&P 500, up 27% this year, is part of the reason why various market-based measures of financial conditions show they are easier than they’ve been since 2021, when the Fed’s key interest rate was still set near zero.
Now, measures of business and consumer confidence are rising amid Fed rate cuts and anticipation of tax cuts and deregulation under President-elect Donald Trump. Given elevated inflation, the financial windfall from a surging bull market, and indications that the economy is on firm footing, the Fed has plenty of reason to stand pat for awhile.
S&P 500
The S&P 500 edged up 0.2% ahead of the Fed announcement, after slipping 0.4% on Tuesday. The S&P 500 finished 0.7% below its Dec. 6 all-time closing high on Tuesday.
A rebounding Nvidia (NVDA) lifted the S&P 500 and other major indexes heading into the Fed decision.
The S&P 500 is up 4.6% since Election Day and 26.9% for the year.
Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
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