BY: Matthew Kimbrough
Portfolio Manager
Happy Holidays
Financial markets have been anything but “frosty” this year. U.S. equity markets have actually given investors quite a lot to cheer about this holiday season. Leading up to today’s FOMC meeting, the S&P 500 index is up around 27%, and the NASDAQ composite is up around 34% year-to-date. The U.S. bond market will likely also end the year in positive territory, with the largest gains being in sectors such as high-yield corporates, high-yield munis, and securitized credit.
But as (possibly sugar-plum-related) visions of positive returns dance through our heads, it is perhaps also important to consider that present equity market valuations imply double-digit EPS growth in 2025, that spreads in both investment grade and high yield credit are near five-year lows, that home prices, gold, and bitcoin are near all-time highs, and that in some form or fashion, all of this is predicated upon a Federal Reserve that somehow continues to normalize U.S. monetary policy while achieving its goals of maximum employment and price stability.
This afternoon, Fed Chair Jerome Powell is expected to deliver some additional holiday cheer in the form of another 25bp Fed Funds rate cut. This will be accompanied by a new set of economic projections from all of the Who’s in Whoville (FOMC members in Washington).
Will inflation estimates prove stickier than the flagpole in A Christmas Story? Will we receive a real Christmas bonus this year or a membership in the Jelly of the Month Club? Whatever the case, hopefully, there won’t be too many “Bah Humbugs” in the accompanying press conference.
The Decision
At the conclusion of today’s FOMC meeting, the Fed Funds rate was cut by 25 basis points, moving the range from 4.50 – 4.75% down to 4.25 – 4.50%. This is the third successive reduction in the Fed Funds rate.
The Statement
This meeting’s Statement contained several amendments that are highlighted in the below chart.
New Economic Projections
The most significant changes to (or facets of) this quarter’s Statement of Economic Projections (SEP) document have been highlighted below:
1. The median Dot Plot projection shows just 50bp total rate cuts in 2025 (vs. a September projection of 100bp), then another 50bp of rate cuts in 2026.
2. The long-run Fed Funds target rate estimate increased again to 3.0%, with six FOMC members remaining at 3.5% or higher (up from four in September).
3. Unemployment projections were lowered to 4.2% in 2024 and 4.3% in 2025.
4. Core PCE inflation expectations were raised by 0.2% in 2024, 0.3% in 2025, and 0.2% in 2026.
5. Real GDP is expected to be 2.5% for 2024, which is 0.5% higher than projected in September.
The Press Conference
In response to his first question on the timing of cuts, Powell stated, “Today was a close call, but we decided that it was the right call, as it was the right decision to foster both of our goals. We see the risks as two-sided – moving too slowly could needlessly undermine economic activity and the labor market, and moving too quickly could needlessly undermine our progress on inflation.” He also added, “We coupled the decision today with the ‘extent and timing’ language in the post-meeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments.”
Curiously, Powell stated that some FOMC participants had started to incorporate the (potentially inflationary) effects of future fiscal policies into their economic projections, while some participants had not and others refused to say.
On recession risk, Powell commented, “I think it’s pretty clear we’ve avoided a recession. Growth this year has been solid. Private Domestic Final Purchases (PDFP) at 3% this year is a really good number. The U.S. economy has been remarkable.”
Another one of Fed Chair Powell’s questions at the press conference was, “Where is the Neutral Rate?” He responded, “What’s listed in the SEP is the long-run neutral rate (i.e., the long-run neutral rate when supply/demand is in balance and there are no external shocks to the economy – and this is not where the economy is at right now). We don’t know exactly where it is, but we know it by its works. What we know for sure is that we’re 100bp closer to it right now. From here, it’s a new phase and we’re going to be cautious about further cuts.”
The Market Reaction
Treasury yields jumped 10–15bp after today’s press conference, and the S&P 500 fell nearly 3% on the day.
Not Investment Advice or an Offer | This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.
