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The market is scared because the Federal Reserve, worried about inflation, is not stepping on the accelerator to cut rates and appease bullish investors.
The vibe is not lost on San Francisco Fed President Mary Daly, often seen as a political dove who is a voting member of the FOMC this year.
“Well, frankly, it was very close and required a lot of deliberation, as is often the case with me and my team, and then also with the FOMC participants. In the end, I decided that it was appropriate to reduce [interest rates] 25 basis points: this will be 100 basis points of recalibration. And I see it as an appropriate adjustment of the level of the official interest rate to the economy,” Daly said on Yahoo Finance’s Opening Bid podcast (video above).
Daly added: “So now I see that the recalibration period is complete. We are now back to the point where we can make our decisions more slowly. It depends on the data, you use the data to affect the incoming forecast and, you know, “Determining how many rates the cuts we ultimately make next year will have to be agile and data-driven.”
On Wednesday, the Federal Reserve cut interest rates by 25 basis points to a range of 4.25% to 4.5%. It marked the Federal Reserve’s third consecutive interest rate cut in 2024, which began with a bang: a 50 basis point reduction on September 18.
Daly voted in favor of lowering interest rates. The only dissenting vote – a rarity under the Jerome Powell-led Federal Reserve – was that of newly appointed Cleveland Fed President Beth Hammack.
Hammack preferred not to cut interest rates.
“I mean, we could get some really positive news on inflation and we’ll react to that if we get it. But I think we want to make sure we finish the job,” said Daly, who noted that bringing inflation to 2% helps build confidence and credibility for the Federal Reserve.
“So we are determined to do that job and that will mean a restricted policy throughout the year. [in 2025] in all probability.”
But what spooked a market that has been riding up Big Tech stocks like Apple (AAPL) and Meta (META) with reckless abandon in December was the Federal Reserve’s failure to commit to an aggressive rate cut in 2025.
The consensus among Federal Reserve officials now is for two rate cuts next year, down from the four forecast in September. The inflation outlook is further clouded by possible actions by the incoming Trump administration, such as possible tariffs on China.
The Dow Jones Industrial Average quickly ended Wednesday’s session with a drop of more than 1,100 points. Stocks stabilized on Thursday and Friday, the latter supported by a slower-than-expected rise in the personal consumption expenditures (PCE) index.
