Markets are on edge ahead of the Federal Reserve's final meeting of 2024, with investor focus shifting to the central bank's projections for 2025 rate cuts rather than the widely expected 25-basis-point reduction.
What Happened: The outcomes of the projections could trigger vastly different market reactions, from relief rallies to sharp declines.
According to Kurt S. Altrichter, the founder of Wealth Advisory firm Ivory Hill, the significance of the Federal Open Market Committee (FOMC) meeting lies in its forward guidance.
While a 25-basis-point rate cut is almost certain, attention will be on the Fed's "dot plot," which signals its outlook for rate reductions in 2025.
Altrichter outlined three key scenarios and their expected market reactions:
- Dovish Scenario: If the Fed signals four rate cuts in 2025 alongside the rate reduction, it would be seen as a bullish outcome. "Solid rally. New highs likely," Altrichter noted, predicting a decline in the 10-year Treasury yield to below 4.30% and a sharp drop in the Dollar Index by around 1%. Cyclical sectors like financials, industrials, and small-cap stocks would likely lead the gains, with commodities such as gold expected to surge.
- Neutral Scenario: The expected baseline involves the Fed cutting rates by 25 basis points and projecting three cuts in 2025. Markets have largely priced in this outcome. Altrichter anticipates a "small relief rally" with tech stocks slightly outperforming cyclicals. The 10-year yield could drift modestly higher, and the Dollar Index might rise above 107.
- Hawkish Scenario: If the Fed signals fewer than three cuts or holds rates steady, markets could experience a sharp sell-off. "Solid drop," warned Altrichter, pointing to a likely spike in the 10-year Treasury yield beyond 4.50% and a surge in the Dollar Index toward 108. All 11 S&P sectors would likely fall, with defensive stocks and mega-cap tech outperforming on relative strength.
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Why It Matters: The stakes are high given the backdrop of recent inflationary and growth signals.
Since the Fed's last policy move in November, inflation has ticked upward, with the Consumer Price Index (CPI) rising from 2.4% in September to 2.8% in November.
Meanwhile, labor market data remains firm, with low jobless claims and steady purchasing manager indices (PMIs). These factors add uncertainty to the Fed's path for rate cuts in the coming year.
"A hawkish shift would signal markets that inflation is hotter and growth is stickier," Altrichter said, highlighting concerns that tighter monetary policy could dampen market optimism for 2025.
Digital assets like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) have taken a nosedive ahead of the FOMC meeting, trading 2.1% and 3.6% down, respectively. XRP (CRYPTO: XRP) is down 5.5% over the past 24 hours.
A neutral or dovish scenario may spur a continuation of the post-election market rally.
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