The US stock market presented a mixed picture on Wednesday as investors grappled with a report suggesting President-elect Donald Trump might declare a national economic emergency to implement tariffs. Simultaneously, minutes from the Federal Reserve’s December meeting indicated that “many” officials favored a cautious approach to interest rate cuts in 2025.
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Dow Jones Industrial Average chart
The S&P 500 (^GSPC) edged up slightly by over 0.1%, while the Dow Jones Industrial Average (^DJI) saw a more substantial increase of 0.25%, adding approximately 100 points. However, the tech-heavy Nasdaq Composite (^IXIC) remained relatively flat, closing just below the unchanged mark. The 10-year Treasury yield (^TNX) hovered around 4.7% in anticipation of Friday’s critical December jobs report.
Trump’s Potential Tariff Declaration Creates Uncertainty
CNN reported that Trump is exploring the use of emergency powers to establish a legal foundation for his proposed extensive tariffs. This news unsettled markets already anticipating potential surprises from the incoming administration, including policy shifts and executive orders.
Investors are closely monitoring economic developments to assess the likelihood of slower interest rate cuts in the coming year. The market experienced a sell-off on Tuesday, and benchmark Treasury yields spiked as strong service sector and labor market data reignited concerns about persistent inflation. This data reinforces the Fed’s suggestion of a more gradual approach to rate reductions than initially projected. According to the CME FedWatch tool, the probability of any easing before May is now less than 50%.
Economic Data and Market Sentiment
Some analysts suggest that the market might begin interpreting robust economic data negatively, viewing it as a catalyst for a “higher for longer” interest rate environment. December saw a slowdown in headcount growth among US private companies, indicating a moderation in hiring demand. However, official figures revealed an unexpected decline in jobless claims last week, suggesting stability in the labor market. This data release occurred a day earlier than usual due to the closure of government offices and the stock market on Thursday for a national day of mourning for former President Jimmy Carter.
Fed Officials Advocate for Prudent Monetary Policy
Minutes from the Federal Reserve’s December meeting, where they reduced interest rates by 25 basis points, highlighted a preference among “many” officials for a gradual pace of rate cuts in 2025. The minutes emphasized the need for a cautious approach to monetary policy decisions in the coming quarters, citing factors such as recent elevated inflation readings, sustained strong spending, reduced downside risks to the labor market and economic activity, and increased upside risks to inflation. While participants generally anticipated inflation moving towards the 2% target, they acknowledged that recent higher-than-expected inflation figures and potential trade and immigration policy changes might prolong the process.
Conclusion: Market Volatility Expected to Continue
The US stock market remains sensitive to developments surrounding potential tariffs and the Federal Reserve’s monetary policy stance. The combination of Trump’s potential tariff actions and the Fed’s cautious approach to interest rate cuts contributes to ongoing market volatility. Investors should anticipate continued fluctuations as these factors continue to influence market sentiment. The upcoming December jobs report will likely provide further insight into the strength of the labor market and potentially impact the Fed’s future decisions on interest rates.
