Fed’s Rate Cut Sparks Market Volatility
The Federal Reserve’s decision to cut its benchmark interest rate to a range of 4.25% to 4.5% on Wednesday sent shockwaves through the market, with stocks plummeting and the VIX surging 74%. However, many analysts believe the reaction was overdone, citing the strong economy and the likelihood of further rate cuts in 2025.
A Hawkish Pivot?
The Fed’s projection of two rate cuts next year, down from four previously, was seen as a hawkish pivot by many market participants. However, economists at Citi believe this stance is unlikely to last, and the Fed will eventually turn dovish once the labor market shows signs of weakening.
Economic Strength Matters Most
According to Schleif, investors were “overreacting” to the Fed’s announcement, ignoring the strength of the economy, which is what matters most for stocks and earnings. The slower pace of Fed cuts is a sign of a strong economy, which is ultimately what drives stock prices and earnings.
Tech Stocks Look Beyond Rate Cuts
Ives believes the Fed’s interest-rate path is not the driving force for tech stocks over the next few years. Instead, he sees the continued development and adoption of AI and a friendlier regulatory environment as the key catalysts for tech heading into 2025.
A Healthy Spot of Profit-Taking
Some analysts view the market’s reaction as a healthy spot of profit-taking, rather than an end to the party. With the economy going strong and the Fed likely to cut rates further in 2025, many see this as a “buy the dip” opportunity.
Fed’s Uncertainty Revealed
Jerome Powell’s performance at the press conference was seen as uncomfortable, with some analysts noting that the Fed chair seemed unsure of his footing. The central bank’s admission of higher uncertainty around inflation’s trajectory has raised concerns about its ability to navigate the economy.
Markets Overreacting?
Many analysts believe markets have a bad habit of overreacting to Fed policy moves. The Fed didn’t deviate from market expectations, and the sell-off may be more due to investors taking profits before the holiday break.
Santa Rally Ahead?
Despite the volatility, some analysts expect a Santa Rally leading into next week, driven by strong earnings and economic growth. The 10-day sell-off may have laid the path for a year-end rally.
Fed’s Signal on Rate Cuts
The Fed’s announcement has sent a clear signal that it has almost completed the phase of interest rate cuts. The year 2025 will be a significant break in the Fed’s rate-cutting cycle, and market expectations have shifted toward a shallower- and slower-than-anticipated rate-cutting cycle.
Reality Check for Markets
The Fed’s announcement has brought back unwanted clouds of uncertainty over monetary policy next year. At a minimum, market expectations have shifted, and the near-term risk remains to the upside for 10-year Treasury yields, creating a likely headwind for stocks.
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