The Federal Reserve might be saying, without actually saying it, that there’s no rate cut coming this December. Traders caught on fast, slashing their bets on a quarter-point cut from 80% to less than 60% in just one day.
Fed Chair Jerome Powell called the U.S. economy’s performance “remarkably good,” which sounds nice but actually means the central bank doesn’t feel pressed to ease up on rates anytime soon. Though he carefully avoided giving any hints about what’s next for the Fed.
Wall Street took a hit. The S&P 500 dropped 0.6%, the Dow lost 0.47%, and the Nasdaq fell 0.64%. All three major indexes are now on track to end the week in the red. Bitcoin tumbled from $92,000 all the way to $88,000 in minutes.
The so-called “Trump trades” that gained traction after the election are losing steam, and bullish fever among traders is fizzling out. Over in Asia-Pacific, it was a mixed bag. Japan’s Nikkei 225 edged up 0.28% after news of the country’s third-quarter economic growth, but China’s CSI 300 slid nearly 1% as its real estate market continues to crumble.
Jerome Powell isn’t “in a hurry”
Powell’s message was clear: no rush. “The economy is not sending any signals that we need to be in a hurry to lower rates,” he said. Sure the October jobs report was disappointing, but Powell blamed it on hurricanes and labor strikes, not a lack of economic strength. The Fed’s cautious approach is aimed at avoiding mistakes, especially with inflation still above the 2% target.
For traders who were banking on a rate cut next month, Powell’s remarks were a reality check. Two-year Treasury yields jumped eight basis points to 4.36% after his speech, and the chance of a December cut now sits at less than 60%. Lindsey Piegza, an economist, predicts the Fed will pause cuts by January, with no more than three rate reductions in 2024.
Not everyone agrees. BlackRock’s Rick Rieder still expects a 25-basis-point cut in December but says the pace of future cuts is up in the air. “The pace at which that happens and whether they actually need it gets really called into question,” he reportedly told CNBC.
Global markets are feeling the pressure
While Wall Street stumbled, China’s numbers were a mixed bag. October retail sales jumped 4.8% year-on-year, beating the 3.8% forecast in a Reuters poll. However, real estate investment between January and October fell 10.3% from last year. This is the steepest decline in nearly two years.
Even Nvidia is making waves in global markets. The company’s transition to its next-gen AI chip has boosted a little-known South Korean firm that’s now a crucial part of Nvidia’s supply chain. Citi analysts see a 40% upside for the company in the next year, proof that even in uncertain times, there are opportunities for those in the right place at the right time.
Inflation remains a tricky problem. The core consumer price index, which excludes food and energy, increased by 0.3% for the third consecutive month. Powell said inflation is on a “sometimes bumpy” path toward the Fed’s 2% goal, but it’s not there yet.
“We are committed to finishing the job,” he said, emphasizing the need for caution as the central bank approaches a neutral rate, where policy neither stimulates nor restricts growth.
The Fed’s gradual approach reflects its effort to avoid overcorrecting. Powell explained that uncertainty about the neutral rate makes it essential to move carefully.
Many Fed officials agree that rates remain in restrictive territory and favor a slow adjustment toward neutrality. Powell’s exact words? “In this situation, what it calls for is us to be careful.”
Meanwhile, productivity gains are playing a big role in shaping the economic landscape. U.S. productivity has grown faster in the last five years than it did in the two decades before the pandemic. This has allowed the economy to expand rapidly without overheating. Powell acknowledged that higher productivity helps keep inflation in check, but it also reduces the need for aggressive rate cuts.
The labor market, too, is a factor. Powell said the labor force is in “solid condition” and has returned to more normal levels consistent with the Fed’s maximum employment mandate.
Trump’s policies make things more complex
Looking ahead, the Fed might face additional challenges if President-elect Donald Trump follows through on his campaign promises. Tax cuts, tighter immigration controls, and new tariffs could create economic crosswinds that complicate monetary policy.
Retaliatory trade actions from U.S. trading partners could offset the positive effects of fiscal stimulus, creating a messy economic situation for us all.
Powell mentioned that tariffs could harm growth while fiscal policy boosts it, leaving the Fed in a tough spot. “What’s really the net effect?” he asked during a Q&A session.
Trump’s criticism of the Fed and Powell personally hasn’t gone unnoticed. At a recent press conference, Powell said he wouldn’t resign if asked to step down, adding that any attempt to demote him would be illegal. One that he’ll happily drag the president to court for.