Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, said that Wall Street's stock sell-off is 'healthy,' and the Fed's cautious forecast for future rate cuts provides investors with a 'reality check.'
In its final meeting of the year, the Fed lowered rates by 25 basis points, bringing its overnight lending rate target range down to 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee indicated that there may only be two more rate cuts in 2025, fewer than the four cuts predicted in September.
All three major stock indices on Wall Street reacted negatively to the Fed's revised outlook, as investors have been betting that the Fed will more aggressively cut borrowing costs.
Siegel stated in an interview, 'The market was (previously) almost out of control... This made them realize that we won't get such low rates as investors bet when the Fed starts its easing cycle.'
Siegel said, 'The market is too optimistic... so I am not surprised by this sell-off,' adding that he expects the Fed to reduce the number of rate cuts next year to possibly only 1 to 2 cuts.
He also stated that the Fed 'may not cut rates next year' as the Federal Open Market Committee raised its future inflation expectations.
The Fed's new forecasts show that officials expect the core PCE price index, excluding food and energy costs, to remain high at 2.5% in 2025, still well above the Fed's 2% target.
Siegel hinted that some Federal Open Market Committee officials may have already considered the inflation impact of potential tariffs. President-elect Trump vowed to impose additional tariffs on China, Canada, and Mexico on the first day of his presidency.
However, Siegel noted that considering Trump may avoid any rebound from the stock market, the actual tariffs may 'not be as large as the market fears.'
The CME's FedWatch tool shows that market participants now expect the Federal Reserve to cut rates until the meeting in June of next year, when the probability of a 25 basis point cut is 43.7%.
Marc Giannoni, Barclays' chief U.S. economist, maintained the bank's baseline forecast that the Fed will cut rates by 25 basis points in March and June next year, fully accounting for the impact of rising tariffs.
Giannoni stated that he expects the Federal Open Market Committee to resume gradual rate cuts around mid-2026, after the inflation pressures from tariffs subside.
Data released earlier this week showed that U.S. inflation rose at a faster pace in November, with CPI data indicating that the November CPI rose 2.7% year-on-year and 0.3% month-on-month. Excluding the volatile food and energy prices, the core CPI rose 3.3% year-on-year in November.
Siegel added, 'This is something that surprised everyone, including the Fed, that short-term rates are already high relative to inflation, while the economy remains strong.'
Jack McIntyre, portfolio manager at Brandywine Global, stated that the Fed has entered a new phase of monetary policy — a pause phase, 'The longer the pause lasts, the more likely the market is to believe that the Fed's next steps for rate hikes and cuts are equally probable.'
He added, 'Policy uncertainty will lead to increased volatility in financial markets in 2025.'
Article reposted from: Jin Shi Data