Wall Street Prepares for a More Cautious Federal Reserve in 2025
As investors reacted anxiously to the projections, what implications does this hold for mortgages and savings accounts?
A more cautious Federal Reserve is expected to reshape Wall Street’s strategy for the upcoming year.
During the December meeting of the Federal Open Market Committee (FOMC), Federal Reserve officials informed financial markets of their intent to follow a slower pace of easing through 2025. Retail traders and institutional investors expressed disappointment, although analysts largely anticipated a deliberate approach to normalizing interest rates amidst renewed inflation concerns.
The median policy rate is projected to drop to 3.9 percent by year-end 2024, from the current range of 4.25–4.5 percent.
Federal Reserve Chair Jerome Powell indicated to the markets that the risks of inflation have increased since the central bank initiated its easing cycle in September.
“As we contemplate further cuts, progress on inflation will be a key focus,” Powell stated, adding, “We have been experiencing stagnation in 12-month inflation.”
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In fact, officials have adjusted their personal consumption expenditures (PCE) inflation target from 2 percent to 2.5 percent for the upcoming year. Powell remarked that it could take another “year or two” to reach the institution’s long-awaited 2 percent inflation goal.
The central bank has consistently maintained that it’s guided by data, and Powell reaffirmed that he and his colleagues will remain attuned to what the data indicates.
“This Fed has demonstrated both caution and a data-driven approach,” stated Robert Johnson, a professor at Heider College of Business at Creighton University, in remarks to The Epoch Times. “If inflation data shows upward trends, the Fed will not hesitate to pause rate cuts or even reverse direction.”
The annual inflation rate has increased for two consecutive months, reaching 2.7 percent, with early estimates projecting that next month’s consumer price index may rise to 2.9 percent.
Meanwhile, Tom Essaye, founder and president of Sevens Report Research, believes the quantity of rate cuts is less critical for the markets. He suggests that the most significant factor is the trajectory of rates.
“The matter at hand is less about the number of rate cuts and more about the rates’ direction—while they continue to fall, the exact pace is not particularly vital,” Essaye expressed in a note circulated to The Epoch Times.
However, Adam Turnquist, chief technical strategist for LPL Financial, signals that uncertainty regarding monetary policy has resurfaced.
“At the very least, market expectations seem to have shifted towards a rate-cutting cycle that is slower and shallower than anticipated,” Turnquist noted in a message sent to The Epoch Times.
This change in sentiment was quickly reflected across the broader market, including Treasuries.
Interpreting Wall Street’s Indicators
In December, the benchmark 10-year Treasury yield has risen by approximately 30 basis points, now reaching 4.56 percent.
This follows an upward trend in yields observed over recent months. Since September, the 10-year yield has surged by nearly 1 percent.
Analysts have drawn varied conclusions regarding the rise in the government bond market since the Fed cut interest rates for the first time post-coronavirus pandemic.
Federal Reserve Chair Jerome Powell appears on a bank of screens on the floor of the New York Stock Exchange, on Nov. 7, 2024. AP Photo/Richard Drew, File
“Ten-year yields increased by 12 basis points in a single day, significantly breaking above November’s peak of 4.50 percent,” Turnquist observed. “This is technically important as it marks a higher high, further supporting evidence of a developing upward trend.”
Could this indicate a potential climb to a 5 percent yield? Some strategists at ING believe it is a feasible target.
Recent developments in monetary policy have also boosted the U.S. dollar.
The U.S. Dollar Index (DXY), which tracks the dollar’s strength against a weighted basket of six currencies, has surged over 1 percent in December, stabilizing around 108.00. This year, the dollar has risen by approximately 6.5 percent.
ING strategists suggest that the dollar could maintain its strength throughout 2025.
A prolonged period of higher rates could have mixed implications for consumers and businesses.
A sustained high interest rate environment may be welcomed by savers and conservative investors, with high-yield savings accounts and money market funds continuing to yield satisfactory returns.
In light of the broader market response on Dec. 18, Jamie Cox, managing partner at Harris Financial Group, viewed the market downturn as an overreaction.
The blue-chip Dow Jones Industrial Average plunged more than 1,100 points by the end of trading on Dec. 18, extending its losing streak to ten days, marking a first since 1974.
“Markets tend to react excessively to Fed policy changes. The Fed’s actions and statements were consistent with market expectations,” Cox commented in a note sent to The Epoch Times.
Following this, traders may have alleviated their concerns as the stock market rebounded in subsequent sessions.
The Dow Jones, Nasdaq Composite Index, and S&P 500 Index recovered much of their earlier losses.
“The silver lining is that this 10-day sell-off may pave the way for a Santa Rally leading into the following week,” Cox remarked.
