Why are the Federal Reserve's post-meeting press conferences must-see television? They can flip the financial markets with a simple phrase or a single word. Consider this: Betting website Polymarket showed a 98% chance that Fed Chair Jerome Powell would start his news conference with the words "Good afternoon." Why did this matter? The last time he skipped the greeting, the markets tanked. Well, he uttered those two words on December 18, and the New York Stock Exchange was still soaked in red ink at the closing bell. The world's largest financial arena is erratic regarding the Fed.
Federal Reserve Sinks the Market
The good news for investors was that the Fed followed through on another 25-basis-point cut to the benchmark federal funds rate, lowering the target range to 4.25% and 4.5%. This represented the third consecutive interest rate cut, meaning the Eccles Building has reduced the policy rate by a full 1% since kicking off the easing cycle in September.
The bad news for retail traders and institutional funds was that officials revised their outlook for the year ahead because of the sticky, stubborn, rotten, no-good inflation. According to the Summary of Economic Projections, a quarterly survey of monetary authorities and their expectations for policy and economic activity, the Fed anticipates two quarter-point reductions in 2025, totaling 50 basis points. In September, the last time the Summary of Economic Projections was updated, the central bank signaled four quarter-point cuts.
What happened? “Risks to inflation are higher,” Powell told reporters.
Indeed, inflation has crept up since Powell and his colleagues launched the new rate-cutting cycle three months ago. Forecasters and models indicate that the next month’s trio of inflation readings will also increase, creating a headache for the Federal Reserve and the incoming administration. Additionally, the quarterly survey shows that the Fed believes inflation will reach a standstill in 2025, with the preferred personal consumption expenditure (PCE) price index touching 2.5% from the September projection of 2.1%.
The central bank chief attempted to assuage concerns by asserting that the policy was in a good place and less restrictive than a year ago. However, this was countered when he admitted that officials could be more cautious and conservative when deciding the next move on interest rates. "Today was a closer call, but we decided it was the right call," Powell said. “We moved pretty quickly to get to here, and I think going forward, obviously, we’re moving slower."
Meanwhile, the Fed will shift back to emphasizing the price stability side of its dual mandate. Why? The Fed expects growth will remain around 2% and the unemployment rate to flatline at 4.3%.
Market Meltdown
Investors were none too pleased by the Federal Reserve’s outlook. The blue-chip Dow Jones Industrial Average crashed more than 1,100 points and registered its first ten-day losing streak since 1974. The tech-heavy Nasdaq Composite Index tanked more than 700 points, while the S&P 500 declined nearly 3%.
Other assets fell. Gold prices tumbled toward $2,600, and silver sank below $30 an ounce. Cryptocurrency was swimming in an ocean of red ink as Bitcoin plunged back toward the $100,000 resistance level. Ethereum, the second-largest digital currency in the $3.45 trillion global market, also erased about 8%. Fartcoin, however, appeared to be the safe-haven asset as it hit the promised land of $1 and enjoyed a $1 billion market cap!
US Treasury yields rocketed, particularly the longer-term government bonds. The benchmark ten-year yield surged above 4.5%. The 20-year topped 4.77%, and the 30-year reached 4.68%. The US Dollar Index (DXY), a metric of the buck against a weighted basket of currencies, rallied more than 1% to touch 108.00. The greenback has been on a roll this year, and the post-meeting ascent added to its year-to-date gain of almost 7%.
What Now?
Around this time of year, Wall Street braces for the Santa Claus rally. The odds suggest a three-quarters chance of Jolly Old St. Nick showering traders with green ink. After the latest crash, armchair investors might be skeptical that they will be given presents. However, the market has routinely thrown hissy fits after Fed meetings, only to recuperate, pare their losses, and initiate another massive bull run. Is this different? Perhaps the trading community has baked higher-for-longer rates into the cake and will move on to the next catalyst that could provoke the running of the bulls or a bear invasion.
President-elect Donald Trump may have been partly accurate when describing Powell’s job at the Economic Club of Chicago in October. “You show up to the office once a month, and you say, 'Let's see: flip a coin.' And everybody talks about you like you're a god.” When one man can drive the world’s largest financial colosseum with a word or action, maybe Trump has a point.
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