This week was crazy on Wall Street thanks in part to Jerome Powell, the head of the Federal Reserve. However, a sign that policymakers have stopped cutting interest rates further seems like the right thing to do after a closely watched inflation indicator and more budget wrangling on Capitol Hill.
Steve Blitz, chief U.S. economist at TS Lombard, said in a Friday note, “The message from the November personal-income data is that the Fed was right to stop right here.”
He also said that the House’s trouble getting a spending bill that would keep the government open was another reason to wait: “The Trump White House is going to have to negotiate to get its way during the next two years.”
The stock market became very unstable on Wednesday after the Federal Reserve cut interest rates as expected and also made it clear that it plans to cut rates less in 2025 than policymakers had said before.
The Dow Jones Industrial Average was down when the closing bell rang, not long after Fed Chair Jerome Powell finished his news conference.
The DJIA -0.07% had dropped more than 1,100 points and was now down for 10 sessions in a row, which is the longest losing run in 50 years. The S&P 500
After the Fed meeting, the SPX +0.56% fell almost 3%, which was its worst day since January 2009, and the Nasdaq Composite COMP +0.93% fell 3.6%.
Peter Boockvar, chief investment officer at Bleakley Financial Group, said that was strange because the rates market had already reached the same conclusion. The Fed only confirmed what the market already thought, which was that rates would go down by about two quarter points next year instead of four. Boockvar compared the market to the main character in the famous children’s book “When You Give a Mouse a Cookie.” He also said that investors then lowered their hopes for rate cuts even more.
Part of what made investors uncertain was that the Fed admitted that inflation has been a bit more stable than expected after September and October numbers that were hotter than expected. “Again, you know, we had a projection for inflation at the end of the year, and it kind of fell apart as the end of the year got closer,” Powell told reporters at his news conference. “That is definitely a big part of how people think.”
That made Friday’s November personal-consumption expenditures index, which is the Fed’s favorite measure of inflation, very important. Even though the PCE reading is very important, it doesn’t usually come as a big surprise. Economists can pretty much guess the reading after seeing the consumer price index and producer price index readings for the month.
The core PCE reading was up 2.8% year over year in November, which was the same as October’s year-over-year reading. This was a little lower than what was expected.
After the relief, prices went through the roof again. In a TV interview, Chicago Fed President Austan Goolsbee said that inflation is still on track to hit the central bank’s 2% target and that “over the next 12 to 18 months rates can still go down a fair amount.” This made people more likely to buy.
Even though stocks still lost money last week, they all got better on Friday. The Dow won almost 500 points, or 1.2%, while the S&P 500 went up 1% and the Nasdaq went up 1.1%.
Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said in a note that the PCE data, which shows soft non-housing services, market services, cooler housing services, and goods that are slightly negative, “supports the Fed’s real-time assessment that the prior months have little signal value for the forward path of inflation.”
“Before Trump shocks, the underlying path of inflation is fine, though it is always a little bumpy. If this is proven again in the coming months, the Fed should be able to cut rates in March and June, he wrote.
When we talk about Trump shocks. Elon Musk, CEO of Tesla Inc. TSLA +3.01% and the richest person in the world, led the charge last week to kill a bill that would have stopped the government from shutting down. A short-term funding measure was finally approved before the deadline at midnight on Saturday, but the chaos added more uncertainty to markets that were already reeling from the Fed’s last meeting of 2024.
In an interview, Kent Engelke, chief economic analyst at Capitol Securities Management, said that the budget fight was mostly just a sideshow for the market. In the coming year, investors will have to figure out how the government will pay for ever-growing debts, which is likely to be a nasty fight.
In the meantime, Blitz said that the November economic figures continue to show renewed inflation in core goods and services, excluding housing and energy. This is linked to the return of improvement in private-sector employment when measured over three months. Since real wages are going up, people can spend more on things they don’t have to, and even though the savings rate is going down, families still have a lot of money saved.
Blitz said, “To sum up, the economy is slowly recovering, which is putting a floor on deflation, and it’s not clear what Trump will do in terms of a cohesive growth plan. The Fed is right to stop here and wait.”
