Fed Cuts Interest Rates by 25 Basis Points Amid Santa Rally Speculation
This is a segment from the Forward Guidance newsletter.
FOMC Rate Cut Announcement
The FOMC lowered interest rates by 25 basis points. Committee members cited commitments to “maximum employment” and targeting inflation closer to 2%. This marks the third consecutive rate cut, with projections indicating a slow down in cuts expected in 2025.
Future Rate Projections
According to CME Group data, the odds of another 25bps cut in January stand at 82%. The median interest rate target for the end of 2025 is projected between 3.75% and 4%, which is 50bps higher than previous forecasts.
Forward Guidance Updates
The FOMC's forward guidance remained largely unchanged but added a key phrase: “extent and timing.” The statement emphasized that adjustments to the federal funds rate will depend on incoming data, evolving outlooks, and risk balances.
Market Reactions
Markets reacted predictably to the FOMC decision. However, the rally observed since the election, referred to as the “Trump trade,” appears to have stalled, with stocks trading sideways except for Big Tech. The S&P 500 rose only 0.2% since December 2, while the Nasdaq Composite gained approximately 3.7%, down from a nearly 6% increase in November.
Political Influences on Markets
Tom Essaye of Sevens Report Research noted an inverse correlation between cyclical stocks and cabinet nominations announced by Trump, indicating political developments may be impacting market momentum.
Outlook for Year-End Rallies
Analysts suggest markets could be preparing for a "Santa rally." Historically, declines often precede upward runs. Currently, the Dow Jones Industrial Average is experiencing its longest losing streak since 1978, spanning nine days. The S&P 500 and Nasdaq Composite both dropped 0.6% shortly after the Fed's announcement.