Played well? – Andrew Caballero-Reynolds/Agence France-Presse/Getty Images
Federal Reserve Chairman Jerome Powell helped fuel a wild week on Wall Street, but a sign that policymakers have put more interest rate cuts on hold looks like the right call after a closely watched inflation indicator and another round of budget shortfall on Capitol Hill. .
“The message from November's personal income data is that the Fed was right to stop here,” said Steve Blitz, chief US economist at TS Lombard, in a note on Friday.
And, he said, the House's difficulty in passing a spending bill that would prevent a government shutdown offered another reason for delay: “The Trump White House will have to negotiate to get its way in the next two years.”
The stock market took a volatile turn on Wednesday after the Federal Reserve secured an expected rate cut while also signaling that it expects to deliver fewer rate cuts in 2025 than policymakers had 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 over 1,100 points and extended its losing streak to 10 straight sessions – the longest in 50 years. The S&P 500 SPX fell nearly 3% for its worst Fed Day performance since January 2009 and the Nasdaq Composite COMP lost 3.6%.
What was strange about that, as Peter Boockvar, chief investment officer of Bleakley Financial Group explained, was that the rate market have already come to the same conclusion. The Fed was only confirming market expectations for around two quarterly cuts next year rather than four. Comparing the market to the title character in the classic children's book, “When You Give A Mouse A Cookie,” Boockvar noted that investors then proceeded to slash expectations of a rate cut even further.
What made investors skeptical was, in part, the Fed's acknowledgment that inflation had proved somewhat more resilient than expected following hotter-than-expected figures in September and October. “Again, we've got, you know, a year-end projection for inflation, and it's kind of falling apart as we get closer to the end of the year,” Powell told reporters at his news conference. “So that's certainly a big factor in people's minds.”
That put a lot of weight on Friday's November personal-consumption-expenditure index, the Fed's preferred gauge of inflation. Although crucial, the PCE reading usually doesn't offer big shocks, with economists largely able to estimate the reading once they've seen the month's consumer price index and producer price index readings.
The November data was final a touch cooler than expectedwith the core PCE reading up 2.8% year-on-year in November, unchanged from October's year-on-year reading.
There was relief, with stocks roaring back. Comments from Fed officials also helped spur buying, with Chicago Fed President Austan Goolsbee arguing in a television interview that inflation remains on track to reaching the central bank's target of 2%. and “over the next 12 to 18 months rates can still go down quite a bit.”
Equities were still reeling from a losing week, but Friday's rally ended the Dow with a gain of nearly 500 points, or 1.2%, while the S&P 500 jumped 1% and the Nasdaq gained 1.1%.
The PCE data – with soft non-housing services, market services and housing services cooling as well as highly negative goods – “supports the Fed's real-time assessment that the preceding months have little signal value for the path forward of inflation ,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said in a note.
“The underlying inflation trajectory is fine – if always a little bumpy – before the Trump shocks. Further confirmation of this in the coming months should allow the Fed to cut in March and signal June,” he wrote.
Speaking of Trump shocks. Elon Musk, chairman of TSLA led Tesla Inc. and the richest person in the world, the effort to torpedo a bipartisan measure aimed at preventing a government shutdown this week. The subsequent scramble to find a stopgap measure before government funding expires at midnight on Saturday added another layer of uncertainty to markets left reeling from the Fed's final meeting in 2024.
The budget showdown was largely a sideshow as far as the market was concernedsaid Kent Engelke, chief economic strategist at Capitol Securities Management, in an interview. But it heads into what is likely to be an ugly battle in the coming year as investors wrestle with the question of how the government will finance mounting deficits.
Meanwhile, November's economic data continues to point to renewed inflation in core goods and services, excluding housing and energy, Blitz said, linking it to the resumption of private sector employment from to measure on a three month rolling basis. Real wages are rising, boosting discretionary spending while households still have an overlap of savings despite a lower savings rate.
“In summary, with the economy in a slow recovery that puts an end to deflation, and with no clear sense of what Trump will achieve in terms of a coherent program for growth, the Fed is right to stop here and wait,” Blitz said.
