The sell-off in stocks on Wall Street was “healthy,” as the Federal Reserve's cautionary outlook on future interest rate cuts gives investors a “reality check,” according to Jeremy Siegel, professor emeritus of finance at the Wharton School at the University of Pennsylvania.
The US Federal Reserve lowered interest rates by a A quarter of a percentage point At its last meeting of the year, it raised the overnight borrowing rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee has indicated that it is likely to cut interest rates only twice in 2025, fewer than the four cuts indicated in the September forecast.
All three major indexes on Wall Street sinking In response to the Fed's revised forecasts, investors were betting on the central bank to remain more aggressive in lowering borrowing costs.
“The market (was) almost in a tough spot… and that brought them to the reality that we're not going to get low interest rates” as investors had been betting when the Fed began its monetary easing cycle, Siegel told CNBC. “Squawk Box Asia.”
“The market has been overly optimistic… so I'm not surprised by the sell-off,” Siegel said, adding that he expects the Fed to scale back the number of interest rate cuts next year, with just one or two.
He added that there was also a “chance of no reduction” next year, as the Federal Open Market Committee raised its forecasts for future inflation.
New Fed forecasts show that officials expect the price index for personal consumption expenditures, excluding food and energy costs, or core personal consumption expenditures, to rise to… It will remain elevated at 2.5% until 2025It is still well above the central bank's target of 2%.
Siegel noted that some FOMC officials may have taken into account the inflationary effects of potential tariffs. President-elect Donald Trump pledged to do so Imposing additional customs duties on ChinaCanada and Mexico on the first day of his presidency.
But Siegel said the actual tariffs may not be “as significant as the market fears,” given that Trump is likely looking to avoid any stock market reaction.
Market participants now expect the Fed to do just that No interest rate cuts until the June meetingwith a 43.7% probability of a 25 basis point cut at that time, according to the Chicago Mercantile Exchange's FedWatch tool.
Mark Giannone, chief US economist at Barclays, maintained the bank's baseline forecast of just two 25 basis point rate cuts by the Fed next year, in March and June, with the effects of tariff hikes fully integrated.
Giannone said he expects the FOMC to resume additional interest rate cuts around mid-2026, after inflation pressures from the tariffs dissipate.
Data released earlier this week showed Inflation in the United States rose at a faster annual pace In November, the Consumer Price Index showed a 12-month inflation rate of 2.7% after a 0.3% increase during the month. Excluding volatile food and energy prices, Core CPI It rose 3.3% year over year in November.
“It is a realization and a surprise to everyone, including the Fed, that given how high short-term interest rates are relative to inflation, 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 this phase lasts, the more likely it is that markets will have to price a rate hike evenly for Reducing the interest rate. “.
He added, “Policy uncertainty will make financial markets more volatile in 2025.”
