Market Jitters: Fed’s Cautious Approach Sparks Volatility
The Federal Reserve’s recent decision to reduce interest rates by 25 basis points has left investors on edge, as the central bank’s cautious approach has sparked concerns about the pace of rate cuts in 2025.
A Close Call for the Fed
San Francisco Fed President Mary Daly, a voting member on the Federal Open Market Committee (FOMC), revealed that the decision to cut rates was a “close call” that required careful deliberation. Daly emphasized that the 25-basis-point reduction was necessary to “right-size” the policy rate to the economy, bringing the total recalibration to 100 basis points.
Data-Dependent Decision-Making
Daly stressed that the Fed will now take a more measured approach, making decisions based on incoming data and forecasts. This data-dependent strategy will guide the central bank’s decisions on future rate cuts, which Daly believes will be necessary to achieve the 2% inflation target.
A Lone Dissenter
The lone dissenting vote came from newly appointed Cleveland Fed President Beth Hammack, who preferred not to cut interest rates. Hammack’s dissent highlights the growing divide within the Fed on the pace of rate cuts.
Inflation Concerns Loom Large
The Fed’s commitment to achieving 2% inflation has sparked concerns about the potential for restricted policy in 2025. Daly emphasized that getting inflation to target is crucial for building trust and credibility for the central bank.
Market Reaction
The Fed’s cautious approach has spooked the market, with the Dow Jones Industrial Average plummeting over 1,100 points on Wednesday. Stocks stabilized on Thursday and Friday, but the outlook remains uncertain.
Economist Weighs In
FWDBONDS chief economist Chris Rupkey warned that the incoming Trump administration’s plans for spending and tax cuts, as well as potential tariffs on China, could derail inflation’s downward trend.
Daly’s Outlook
Daly remains information-dependent and hasn’t ruled out a rate hike in 2025. While she doesn’t see inflation accelerating on the horizon, she emphasized the need for agility and data-dependence in the Fed’s decision-making process.
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