alt text: A trader works on the floor of the New York Stock Exchange.
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Markets are overwhelmingly predicting a quarter-point interest rate reduction by the Federal Reserve at its December policy meeting, as indicated by the CME FedWatch tool. This anticipation comes as investors closely watch the Fed’s final policy decision of the year, seeking clarity on the future trajectory of interest rates. The Dow Jones Industrial Average showed early gains, potentially breaking a nine-day losing streak, while the 10-year Treasury yield remained relatively stable around 3.95%.
Market Expectations and Expert Insights on Fed’s Move
The consensus view is that the Fed will implement a 25 basis point rate cut. However, considerable attention is focused on the accompanying Summary of Economic Projections and Chairman Jerome Powell’s subsequent press conference. These are expected to provide crucial insights into the Fed’s monetary policy stance for the upcoming year.
John Velis, FX and Macro Strategist at BNY, anticipates not only a quarter-point reduction today but also projects further cuts totaling 100 basis points in the next year. He notes that slowing disinflation might lead the Federal Open Market Committee (FOMC) to adopt a more cautious approach in 2025.
Conversely, David Morrison, senior market analyst at Trade Nation, suggests the Fed might pair the rate cut with hawkish commentary, signaling a potential pause in its easing cycle. He cites factors such as the incoming administration, a recent uptick in inflation, reasonable US economic growth, and the stock market’s strength as potential justifications for a more cautious stance.
US Stock Market Performance at Open
At the opening bell, the major US indices displayed a mixed performance:
- S&P 500: 6,044.72, down 0.10%
- Dow Jones Industrial Average: 43,538.69, up 0.20% (+88.79 points)
- Nasdaq composite: 20,041.84, down 0.32%
Anticipating a Pause in the Rate-Cutting Cycle
alt text: A graph showing the federal funds rate.
Market sentiment increasingly leans towards the Fed pausing its rate-cutting cycle in early 2025. Current pricing suggests an 80% probability of rates being only 25 basis-points lower in January, implying a pause either this month or next. This expectation is underscored by Richard Flynn, managing director of Charles Schwab’s UK arm, who anticipates persistent inflation leading to a pause in early 2025. Before the January policy meeting, the Fed will have access to further inflation and jobs reports, which could influence their decision.
Other Market Developments and Commodity Performance
Beyond the Fed’s decision, other notable market developments include:
- Concerns about dwindling cash holdings potentially signaling a sell-off in stocks, according to Bank of America.
- Tesla reaching a new record high following optimistic price targets from Wall Street analysts.
- Morgan Stanley’s top stock strategist outlining a stock market playbook for 2025.
In the commodities market:
- West Texas Intermediate crude oil rose to $70.67 a barrel.
- Brent crude oil increased to $73.62 a barrel.
- Gold slightly decreased to $2,642.37 an ounce.
- Bitcoin experienced a drop to $104,793.
Conclusion: A Pivotal Moment for Monetary Policy
The Fed’s December decision marks a critical juncture for monetary policy. While a quarter-point rate cut is widely expected, the accompanying signals regarding future policy direction will be crucial in shaping market sentiment and influencing investment decisions in the coming year. The balance between addressing persistent inflation and supporting economic growth will be a key determinant of the Fed’s next moves.
