Economy
The Federal Open Market Committee announced a third consecutive rate cut on Wednesday, decreasing the overnight rate by 0.25%. This rate cut was widely anticipated, but what becomes unclear is how the Fed will handle rates in 2025. Fed Chair Jerome Powell's press conference made it clear that the Fed is unhappy with recent progress on inflation. “We have been moving sideways on 12-month inflation," he remarked on Wednesday. That claim was backed up with further data on Friday morning as the Fed's benchmark for inflation, the core personal consumption expenditures price index (core PCE) rose from 2.79% to 2.82%. Six months ago that was 2.7%, and one year ago was 3%.
Holding rates higher in so-called "restrictive territory" is supposed to cool the economy off, leading to lower inflation. One of the risks to the economy with rates being held higher for longer is a weaking jobs market. Powell noted in his remarks that the labor market is in fact cooling, but they are not concerned with the degree of which it is slowing. While the labor market is still fairly strong, we have seen the unemployment rate increase this year from 3.7% to 4.2%, and the four week moving average for weekly unemployment insurance claims has risen from 200,750 back in January to 225,500 today. It's like seeing a chip in your windshield as you head into the colder winter months. We can get by for a while longer, but in the back of your mind you know you'll need to do something before too long or you run the risk of that chip turning into a full blown crack.
Markets
Nobody had even popped champagne at the New Year's Eve party before Jerome Powell said the party might be ending early. That was how the market reacted during the Fed's press conference Wednesday. We got the rate cut, but we also got a dose of Powell's medicine as he looked to temper expectations heading in to the new year. He commented on the FOMC members discussing the incoming administration's policy as causing some uncertainty around inflation. David Kelly, JP Morgan's chief global strategist, said, "They are trying to put a stake in the ground saying, ‘This is what you should expect from us’ so they can try to avoid or postpone any fight with the administration next year or in 2026."
The market's initial reaction on Wednesday was extreme, but Friday's action recovered some of the damage. For the week, the S&P 500 fell by 1.99%. We are still up more than 24% on the year and just 2.6% from the all-time high. The daily swings in the market this week reminded us of the analogy of someone walking a dog through a park. The person holding the leash walks at a steady pace in a straight line, not ever wavering much. The dog on the end of the leash moves left and right, stopping to sniff something on the ground before bounding forward. Ultimately they are tethered together and if you zoom out, they move along the same path. In this analogy, the person holding the leash is the economy, and the dog is the stock market.
What We're Reading
- Sharing Lessons - Humble Dollar
- On Ignoring Wall Street's Year-End Targets - NY Times
Have a great weekend.
Dogwood Wealth Management