stock selloff after the Fed’s rate cut is healthy

Wall Street’s stock selloff was “healthy” as the Federal Reserve’s cautious projection of future rate cuts gives investors a “reality check,” according to Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School.

The U.S. central bank cut interest rates by a quarter of a percentage point at its last meeting this year, bringing its overnight rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee indicated it is likely to cut interest rates only twice more in 2025, fewer than the four cuts indicated in its September forecast.

All three major Wall Street indexes fell in response to the revised Fed outlook as investors bet the central bank would remain more aggressive in lowering borrowing costs.

“The market (had been) in almost a runaway situation … and this brought them to the realization that we’re just not going to get interest rates as low” as investors were betting on when the Fed started its easing cycle, Siegel told CNBC’s “Squawk Box Asia.”

“The market was overly optimistic … so I’m not surprised by the selloff,” Siegel said, adding that he expects the Fed to reduce the number of rate cuts next year by just one or two cuts.

There is also “a chance of no cut” next year, he said, as the FOMC raised its inflation forecast going forward.

The new Fed projections show that officials expect the price index for personal consumption expenditures excluding food and energy costs, or core PCE, to remain elevated at 2.5% until 2025still significantly higher than the central bank’s target of 2 per cent.

Siegel suggested that some FOMC officials may have factored in the inflationary impacts of potential rates. President-elect Donald Trump has promised to impose additional tariffs on China, Canada and Mexico on day one of his presidency.

But the actual tariffs may not be “as big as the market fears,” Siegel said, as Trump would likely look to avoid any stock market backlash.

Market participants now expect that the Fed will not cut interest rates before the meeting in Junepriced in a 43.7% chance of a 25 basis point cut at the time, according to CME’s FedWatch tool.

Marc Giannoni, Barclays chief economist, maintained the bank’s baseline projection of just two 25 basis point rate cuts by the Fed next year, in March and June, while fully factoring in the effects of rate hikes.

Giannoni said he expects the FOMC to resume gradual rate cuts around mid-2026 after inflationary pressures from tariffs fade.

Data earlier this week showed US inflation rose at a faster annual pace in November, with the consumer price index showing a 12-month inflation rate of 2.7% after a 0.3% increase on the month. Excluding volatile food and energy prices, the core consumer price index rose 3.3% year-on-year in November.

“It’s a realization and a surprise to everyone, including the Fed, that given how high short-term interest rates have been relative to inflation, that the economy can remain as strong as it is,” Siegel added.

The Fed has entered a new phase of monetary policy — the pause phase, said Jack McIntyre, portfolio manager at Brandywine Global, adding that “the longer it goes on, the more likely it is that markets will have to price a rate hike over a rate cut. .”

“Political uncertainty will create more volatile financial markets in 2025,” he added.