In a December meeting that will be remembered for its seismic impact on markets, the Federal Reserve delivered a widely anticipated 25-basis-point interest rate cut Wednesday, bringing the target range to 4.25%-4.5%.
Yet, it wasn't the rate cut itself that shocked Wall Street: it was the Fed's revised economic forecasts and Chair Jerome Powell's stance that crushed expectations for deeper rate cuts in 2025.
In its December economic forecasts, the Fed raised inflation projections for 2025, signaling that only two rate cuts might be on the table for the year. This marked a dramatic shift from the expectations that had fueled investor optimism in recent weeks.
Powell cemented this hawkish tone during the press conference, stating that after a 100-basis-point reduction in 2024, the Fed would enter a "new phase" of monetary policy. With rates nearing neutral levels, Powell emphasized the importance of a cautious approach, erasing any lingering hopes for aggressive easing.
In true Grinch fashion, Powell's message drained investor hopes for a Santa Claus Rally, a seasonal market trend that sees equities showing strong gains in the second half of December.
The S&P 500 — as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) — tumbled 3%, recording its worst single-day drop since September 2022, while the U.S. Dollar Index surged to a two-year high as investors recalibrated their expectations.
Bitcoin (CRYPTO: BTC) demonstrated significant sensitivity to macroeconomic developments, dropping below $100,000 after reaching a record high of $108,388 one day prior to the Federal Reserve meeting.
Friday brought a brief reprieve as the Fed's preferred inflation gauge for November came in lower than expected. Yet the Fed's sting has left lingering wounds that only sustained progress in disinflation can heal.
The focus now shifts to 2025. Investors are bracing for the fiscal policies of the incoming Trump administration, the potential for a government shutdown and the broader implications of Fed monetary policy.
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