Stocks, Bonds Lower on Powell’s Remarks: Markets Wrap

On By Littum

(Bloomberg) — U.S. stocks fell further and bond yields rose after the Federal Reserve cut interest rates by a quarter of a point as expected, but reduced its forecast for cuts in 2025.

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The S&P 500 fell nearly 2% and the Nasdaq 100 fell 2.6%. The policy-sensitive two-year US Treasury yield rose 10 basis points to 4.35%. Bloomberg’s target for the dollar rose to the highest level since November 2022.

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On Wednesday, Fed Chairman Jerome Powell reiterated that the central bank would be more cautious as it considers further adjustments to the key interest rate. He also added that it was still “meaningfully restrictive” and the committee is “on track to continue cutting.”

Powell reiterated at the press conference that the Fed was committed to reaching its 2% target.

“We will not settle for that,” he said of inflation remaining above that target.

Markets are reacting to several Fed officials writing fewer rate cuts for next year than they expected a few months ago. Traders are now pricing in less than half a point of cuts in 2025.

“Dots are hawkish, even relative to what were pretty hawkish expectations — it’s taking a lot longer to get to ‘neutral’ — actually it’s not going to get there in the forecast horizon,” said Scott Ladner of Horizon Investments. “Additionally, Powell characterizes this change as more about inflation concerns than robust economics, so hawkish for the ‘wrong reason’.”

Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, called Powell “a hawk in pigeon’s clothing.”

“Despite downplaying the recent decline in disinflation while boasting about the strength of economic momentum, he still suggested that the tariffs will not be written off as temporary and that the two-cut forecast for 2025 is necessary because the policy must remain restrictive,” he said. said.

Whitney Watson of Goldman Sachs Asset Management expects the Fed to skip a rate cut in January before resuming its easing path in March.

“While the Fed chose to round out the year with a third straight rate cut, its New Year’s resolution appears to be a more gradual pace of easing,” Watson, global co-head and co-chief investment officer for interest rates and liquidity solutions at the firm, said.

Key events this week:

  • Japan interest rate decision, Thursday

  • UK BOE interest rate decision

  • US revised GDP, Thursday

  • Japan CPI, Friday

  • China’s prime interest rates on loans, Friday

  • Eurozone consumer confidence, Friday

  • US Personal Income, Consumption and PCE Inflation, Friday