Federal Reserve Chairman Jerome Powell has had a wild week on Wall Street, but a signal that policymakers have suspended further interest rate cuts appears to be the right thing to do after a closely watched inflation indicator and a new round of budget deficits on Capitol Hill.
“The message from November’s personal income data is that the Fed was right to stop here,” Steve Blitz, chief U.S. economist at TS Lombard, said in a note Friday.
And, he said, the House’s difficulty in passing a spending bill that could avert a government shutdown provided another reason for pause: “The Trump White House will have to spend the next two years negotiating to to get his way.”
The stock market took a volatile turn on Wednesday after the Federal Reserve delivered an expected rate cut while indicating that it expected to make fewer rate cuts in 2025 than policymakers had previously indicated.
When the closing bell rang shortly after Fed Chairman Jerome Powell wrapped up his news conference, the Dow Jones Industrial Average DJIA had fallen more than 1,100 points and extended its losing streak to ten straight sessions – the longest in fifty years. The S&P 500 SPX fell nearly 3% for its worst Fed Day performance since January 2009, and the Nasdaq Composite COMP lost 3.6%.
The strange thing about it, as Peter Boockvar, chief investment officer at Bleakley Financial Group, explained, was that the interest rate market had already come to the same conclusion. The Fed only confirmed market expectations for a cut of about two quarter points next year instead of four. Boockvar compared the market to the title character from the classic children’s book “When You Give A Mouse A Cookie,” noting that investors subsequently lowered interest rate expectations even further.
Part of what gave investors pause was the Fed’s acknowledgment that inflation has proven slightly more resilient than expected, following higher-than-expected readings in September and October. “Again, we had, you know, we had a year-end inflation projection, and it fell apart as we got to the end of the year,” Powell told reporters at his news conference. “So that’s definitely a big factor in people’s thinking.”
That put a lot of emphasis on Friday’s November personal consumption expenditure index, the Fed’s favorite inflation gauge. The PCE value, while crucial, does not typically deliver major shocks, with economists able to estimate its value largely after seeing the consumer price index and producer price index for the month.
November data ended up being slightly cooler than expected, with core PCE rising 2.8% year-over-year in November, unchanged from October’s year-over-year value.
Relief followed, as stocks roared back. Comments from Fed officials also helped spur buying, with Chicago Fed President Austan Goolsbee arguing in a television interview that inflation remains on track to reach the central bank’s 2% target and that “interest rates will continue to rise in the coming months.” can still drop considerably within twelve to eighteen months. quantity.”
Stocks still had a losing week, but Friday’s rally saw the Dow Jones finish up nearly 500 points, or 1.2%, while the S&P 500 rose 1% and the Nasdaq gained 1.1%.
The PCE data – which includes soft non-housing services, market services and cooler housing services, as well as fractionally negative goods – “supports the Fed’s real-time assessment that the preceding months have little signaling value for the forward path of inflation,” said Krishna Guha, chief from the global policy and central bank strategy team at Evercore ISI, in a note.
“The underlying inflation trajectory is fine – if always a bit bumpy – ahead of Trump’s shocks. Further confirmation of this in coming months should allow the Fed to signal cuts in March and signal June,” he wrote.
Talk about Trump shocks. Elon Musk, the TSLA chairman of Tesla Inc. and the world’s richest person, led the effort this week to torpedo a bipartisan bill intended to prevent a government shutdown. The ensuing scramble to come up with an emergency measure before funding for the government runs out at midnight Saturday added a new layer of uncertainty to markets reeling in the wake of the Fed’s last meeting of 2024.
The budget confrontation was largely an afterthought for the market, Kent Engelke, chief economic strategist at Capitol Securities Management, said in an interview. But it is entering what is likely to be an ugly battle in the coming year, as investors grapple with how the government will finance mounting deficits.
Meanwhile, November economic data continues to point to renewed inflation in core goods and services, excluding housing and energy, Blitz said, linking this to the renewed improvement in private sector employment, measured on a three-year rolling basis. months. Real wages are rising, boosting discretionary spending, while households still have a surplus of savings despite a lower savings rate.
“In short, with the economy slowly recovering and disinflation undermining, and no clear picture of what Trump will achieve in terms of a coherent growth program, the Fed is right to stop here and wait.” Blitz said.
