For those anticipating a calm end to the year, the US Federal Reserve's latest monetary policy outlook has delivered a shock by scaling down its projected rate cuts for 2025 from four to just two. Global equities reacted with an across-the-board selloff, and the Dow Jones logged its tenth straight session of loss, the longest losing streak in five decades.
The US Federal Reserve's decision to cut interest rates while inflation was 'not clearly decelerating' was a mistake, Ecognosis Advisory's CEO Andrew Freris told Moneycontrol, adding that Powell has created 'confusion and instability' in the equity markets. Going into 2025, the US Fed might need to wait for inflation to stabilises below 2% before consider to cut rates again, Freris added.
Here is an edited excerpt of his interaction with Moneycontrol.
Are we looking at a prolonged pause before further cuts?
If you examine the Fed’s announcement, it seems they’ve lost the plot. Their decision to opt for only two cuts stems from accelerating inflation, yes inflation has been going up for the last 3 months. This makes it impossible for the Fed to continue slashing rates. The markets reacted accordingly, collapsing after this revelation.
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Was the Fed too hasty in its initial 50 basis point rate cut?
Absolutely. Cutting rates while inflation was not clearly decelerating was a mistake. The Fed has an inflation target of 2%, which it hasn’t met. Inflation has remained stubbornly above this threshold. Cutting rates in this scenario only creates confusion and market instability, as we’ve seen with the recent sell-off.
What is your expectation for rate cuts in 2025?
I’m sceptical of a 50 basis point cut in 2025 unless inflation begins to decline significantly. Even then, the Fed might need to wait until inflation stabilises below 2% before cutting rates. Adding to the complexity, the expected tariffs from President Trump will have a one-off inflationary impact, further complicating the inflation outlook.
The tariffs, effectively a tax on imports, will push up prices at stores like Walmart, where many goods are imported from China. While the inflationary impact of tariffs is typically a one-off, markets might overreact, interpreting it as a broader inflationary trend.
Should the Fed consider raising its 2% inflation target?
The Fed could consider revising its inflation target, particularly given the incoming administration’s tariff plans. Tariffs are not inherently inflationary but do have a one-time impact on the Consumer Price Index (CPI). If markets mistake this one-off effect for sustained inflation, it could fuel further instability.
Read More: Track live market action right here on Moneycontrol.
Are US markets vulnerable to more corrections, especially technology stocks?
US markets have had an exceptional year, but the Fed’s stance and Trump’s policies have introduced uncertainty. The tech sector, which has been the primary driver of the rally, is especially vulnerable. With interest rate cuts less likely, tech firms—big beneficiaries of the recent monetary easing—are now facing headwinds.
Read More: Fed fallout - a 10% correction on S&P 500 not ruled out, says Ed Yardeni
What does this mean for emerging markets?
The impact on emerging markets varies. China, the largest emerging market, continues to post robust GDP growth despite a weak equity market performance. The US’s policies may not immediately affect China’s domestically driven economy, though Trump's tariffs could have some impact. However, in my opinion, there is a great degree of misunderstanding how badly the Chinese economy is going to be hit by the tariffs threatened by Trump.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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