The Federal Reserve cut its benchmark interest rate on Wednesday to a range of 4.25% to 4.5%, bringing its drop since mid-September to 100 basis points.
Wall Street typically celebrates rate cuts as lower borrowing costs boost spending, investment and hiring. Lower rates also signal that inflation is under control and make risky assets like stocks relatively more attractive by undercutting yields on safer assets like Treasuries.
However, stocks plunged as Federal Reserve officials projected two cuts next year, down from four previously.
The S&P 500 and Dow Jones fell nearly 3%, while the Nasdaq 100 fell nearly 4% after the meeting. The sharp drop fueled a 74% rise in the VIX, better known as the stock market fear gauge. It was the second largest one-day jump in history.
But while many market professionals still urge caution amid fewer rate cuts in 2025, several Wall Street analysts view Wednesday’s sell-off as a “buy the dip” opportunity, and the intense reaction to the Federal Reserve meeting will derail policy this year. Santa Claus demonstration.
Here’s what investors and analysts are saying after Wednesday’s brutal sell-off.
Investors were “overreacting” because they knew before the meeting that the Federal Reserve would likely signal a pause in rate cuts, Schleif said.
In addition, the economy remains strong, which is the most important thing, he added.
“Markets seemed to ignore the number of times and ways Chairman Powell pointed out how strong the economy is,” Schleif said. “The slower pace of Fed cuts is for a good reason, which is that the economy is strong, and a strong economy is ultimately what matters most for stocks and earnings.”
Citi economists said the Fed’s hawkish turn likely wouldn’t last and would instead turn dovish once the labor market showed signs of weakening.
With just 50 basis points of interest rate cuts priced into the market between now and mid-2026, Hollenhorst isn’t buying it.
“The continued weakening of the labor market will likely become even more evident in the coming months, keeping the Fed cutting at a faster pace than markets are pricing in,” Hollenhorst said in a note Wednesday. “We expect a strong dovish turn from Powell and the committee in the coming months.”
Ives said the path of the Federal Reserve’s interest rates is not the driving force for tech stocks in the coming years.
“Ultimately, this does not move the needle for a soft landing and bullish backdrop for risk assets,” Ives said in a note to clients.
Instead, Ives told his clients to stay focused on the technology’s two biggest catalysts heading into 2025: the continued development and adoption of AI and a friendlier regulatory environment that should pave the way for more mergers and acquisitions.
“US markets played the role of Scrooge on Wednesday, falling as the Federal Reserve’s hawkish tone dampened the Christmas cheer.
“Investors should view this as a healthy time for profit-taking rather than the end of the party, after what has been a fantastic run for markets since the US election.”
“This is a Federal Reserve that really has no faith in its point of view at any time and is willingly reactive rather than proactive even though its actions affect the economy with long delays.
“I would have thought that between the comments and the changes in forecasts, the world has changed dramatically since the huge rate cut just three months ago. Clearly it doesn’t take much for this Fed to change its mind. I can guarantee it will change again.”
“‘We had an inflation forecast for the end of the year, and it kind of fell apart.’
“Not exactly the confidence-inspiring line one would expect from a Federal Reserve chair. But Jerome Powell’s performance at yesterday’s press conference was not his finest hour. In what might have been the most uncomfortable display of his term, Powell ceded the stage to hawks, visibly tense as he tried to sell a strategy he did not appear to fully endorse.
“Powell noted that inflation is ‘moving sideways’ and ‘increased uncertainty’ around its trajectory. These admissions reveal a central bank increasingly unsure of its position, with rate markets now expecting only one cut by 2025 (as we do it), and without a real consensus on when that final cut would come.
“Markets have a very bad habit of overreacting to the Federal Reserve’s policy actions. The Fed did not do or say anything that deviated from what the market expected; this seems more like, I’m going away for Christmas vacation , so I will sell and start operating next year.
“The good news is that this 10-day sell-off should set the stage for a Santa Claus rally that will extend into next week.”
“Santa came early and dropped a 25bp rate cut on market reserves, but accompanied it with a note saying there would be coal next year.
“The market is looking ahead and ignored the good news of today’s rate cut and instead focused on the scarcity of rate cuts for next year.”
“What was heard last night from the Federal Reserve in support of the interest rate cut is an obstacle for the stock market.
“The Federal Reserve is sending a clear signal that it has almost completed the interest rate cutting phase. The year 2025 will be a significant break in the Federal Reserve’s rate cutting cycle.
“Trump’s blessing could quickly become a curse. If the market expects yields to continue rising, the Federal Reserve is unlikely to intervene against these forces. If inflation data continues to rise in January and February, then that could be everything for the Interest rate cuts”.
“While the Fed is taking all the heat for today’s sell-off, a reality check on overbought conditions, deteriorating market breadth, and rising rates was arguably in order.
“Overall, today’s FOMC meeting brought back some unwanted clouds of uncertainty over monetary policy next year. At the very least, market expectations have shifted toward a shallower and slower rate cut cycle of “Technically, near-term risk remains on the upside for 10-year Treasury yields, creating a likely headwind for stocks.”
“The Federal Reserve has poured cold water on the market’s already dwindling hopes for generous rate cuts in 2025.
“Given the risk of a resurgence in inflation due to possible trade tariffs and a slowdown in immigration that has been cooling pressure on the labor market, market expectations of just two more cuts in 2025 now appear reasonable.
“We expected this political outcome, so it doesn’t change our recently improved view on U.S. stocks. U.S. stocks can still benefit from artificial intelligence and other mega forces, strong economic growth, and broad-based earnings growth, and we see that surpass their international peers in 2025.”
“With an economy that is tanking and an incoming president with a lax fiscal agenda, one wonders why the Federal Reserve found it necessary to make cuts.
“Is this to curry favor with the incoming administration or is there a bump in the road that the Fed can see the rest of us are overlooking?”
“The FOMC cut as aggressively as it could manage yesterday, and market participants weren’t particularly happy with what they heard.
“It was, however, a little disconcerting to see such a violent market reaction to Powell’s comments, particularly considering how ‘every man and his dog’ had been expecting this kind of turn in the run-up to the meeting.
“It seems, however, as if the markets have overreacted to Powell’s message, and that we may have reached a hawkish extreme here.
“Accordingly, I would be a buyer of dip stocks here, as strong earnings and economic growth should see the path of least resistance continue to lead higher, offsetting the diminishing impact of the ‘Fed Put’.”
Correction: December 19, 2024 — An earlier version of this story incorrectly named an investment company. It’s BMO Private Wealth, not BMP Private Wealth.
He also misstated the Rabobank analyst’s name as Stephen Koopman. This is Stefan Koopman.
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