Well played? – Andrew Caballero-Reynolds/Agence France-Presse/Getty Images
Federal Reserve Chairman Jerome Powell helped spark a tumultuous week on Wall Street, but the signal that policymakers have held off on further rate cuts appears to be the right call after another round of budget meltdowns on Capitol Hill.
“The message from November’s personal income data is that the Fed was right to stop right here,” Steve Blitz, chief US economist at TS Lombard, said in a note on Friday.
And, he said, the House’s difficulty in passing a spending bill that would have prevented a government shutdown offers another reason to stop.
The stock market took a volatile turn on Wednesday after the Federal Reserve made an expected rate cut while also signaling that it expects fewer rate cuts in 2025 than policymakers previously indicated.
When the closing bell rang shortly after Fed Chairman Jerome Powell finished his news conference, the Dow Jones Industrial Average DJIA had fallen more than 1,100 points and extended its losing streak to 10 straight sessions, the longest the S&P 500 SPX has fallen in 50 years is down almost 3%, its worst performance since January 2009 During the Fed day, the Nasdaq Composite COMP lost 3.6%.
The strange thing about it, as Peter Boukwar, chief investment officer at Bleakley Financial Group explained, was that the interest rate market had already come to the same conclusion. The Fed was simply confirming market expectations for about two quarterly basis point cuts next year, not four. Likening the market to the title character in the classic children’s book, Boukvar noted, investors then further reduced rate cut expectations.
What made investors dubious was, in part, the Fed’s admission that inflation was a little more resilient than expected after hotter-than-expected readings in September and October , and it’s kind of collapsed as we get closer to the end of the year,” Powell told reporters at his press conference. “So that’s certainly a big factor in people’s thinking.”
That drew a lot of attention to Friday’s November personal consumer spending index, the Fed’s preferred gauge of inflation.The PCE reading, while important, usually doesn’t cause much shock because economists can generally estimate it when they see the month’s consumer spending. price index and producer price index.
The November data was, after all a touch cooler than expectedwhose core PCE rose 2.8% year-on-year in November, unchanged from last year’s reading in October.
There was a lull, and stocks rallied again.Comments from Fed officials also helped boost buying, with Chicago Fed President Austin Goolsby insisting in a televised interview that inflation remains on track. reach the Central Bank’s 2 percent target and that “rates could still drop quite a bit over the next 12 to 18 months.”
Stocks still suffered for the week, but Friday’s rally saw the Dow finish up nearly 500 points, or 1.2%, while the S&P 500 jumped 1% and the Nasdaq added 1.1%.
The PCE data, which covers soft non-housing services, market services and cold housing services, as well as negative fractional goods, “supports the Fed’s real-time assessment that prior months have little signaling value for inflation progress,” Krishna said. Guhan, Head of Global Policy and Central Bank Strategy at Evercore ISI, notes:
“The underlying inflation trajectory is good, if always a bit bumpy, ahead of Trump shocks. Further confirmation of this in the coming months should allow the Fed to taper in March and signal in June,” he wrote.
Speaking of Trump shocks. Elon Musk, Tesla Inc. TSLA’s president and the world’s richest man led the torpedoing effort. a bipartisan bill aimed at preventing a government shutdown this week. Government funding had to run out before the midnight deadline on Saturday to craft a resolution package, adding another layer of uncertainty to markets reeling from the Fed’s last meeting in 2024.
The budget clash was largely a sideshow what about the market?,” Kent Engelke, chief economic strategist at Capitol Securities Management, said in an interview. deficits.
Meanwhile, economic data for November continued to show renewed inflation in core goods and services, excluding housing and energy, Blitz said, attributing this to a renewed improvement in private sector employment when measured on a three-month basis.Real wages are rising, boosting discretionary spending , while households still have a preponderance of savings despite the low savings rate.
“With the economy in general experiencing a slow recovery that is allowing inflation to weaken, and with no clear picture of what Trump will accomplish in terms of a coherent plan for growth, the Fed is right to stop here and wait,” Blitz said.
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