- The FED Chair statements shake up the markets
- They point to possible problems from a potential rise in inflation
- S&P 500 was down 3%, tech Nasdaq 3.6%, and other markets also experienced declines
The third rate cut was successful but was accompanied by uncertainty about further ones and the FED expressed concerns about inflation and the initiatives of the current administration which they believe may accelerate.
Markets immediately reacted to this, turning red and falling. In particular, the S&P 500, Nasdaq, STOXX, MSCI, and others suffered.
More About Market Conditions and Analysts’ Forecasts
FED Chair Jerome Powell commented on their concerns regarding the uncertain future state of the economy, which could affect decisions on the next cuts.
“When the path is uncertain, you go a little slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”
This is largely due to the fact that although inflation has fallen significantly, the two percent target has not yet been reached and it is believed that Donald Trump’s tax initiatives could potentially accelerate it.
According to the central bank, of the four rate cuts planned for next year, we are likely to see only two and the possibility of a new run-up in inflation also remains.
Jamie Cox, managing partner at Harris Financial Group in Richmond commented:
“The Fed played the role of Grinch today — taking back two rate cuts in 2025.”
Also, Matthew Miskin, co-chief investment strategist at John Hancock Investment Management:
“Rates are the biggest risk for markets from here on out. You had this period where the Fed had kind of declared a victory… and the reacceleration of inflation is causing them to really have to rethink all the progress.”
This includes a potential problem with the 10-year U.S. Treasury yield, which although hitting a 6-1/2 month high at 4.54%, if the benchmark yield of 4.5% is breached, could cause turbulence for equities and favor lower-risk alternatives.
Michael Mullaney, director of global markets research at Boston Partners said:
“Yields are going to become more of a problem. The 10-year yield will rise to 5% next year.”
We can see how the crypto and stock markets immediately reacted to such statements – the S&P 500 fell 3%, the tech Nasdaq 3.6%, European STOXX stocks fell about 1.5%, and the MSCI World Stock Index fell to its lowest level in more than six weeks.
However, things are not as bad as they seem, and in fact, the S&P 500 and Nasdaq indexes are still up 23% and 29%, respectively, so far this year.
Some investors are quite optimistic Jason Draho, head of asset allocation Americas at UBS Global Wealth Management believes that the S&P 500 price target of 6,600 by the end of next year, about 12% above Wednesday’s closing level and said:
“The Fed is still biased towards cutting. It’s a direction that still is supportive for valuations, is still supportive for stocks to be higher.”
Conclusion
The market is not experiencing its first big decline this year, but still recovered and continued to rise. Let’s see how the market will do this time and how Donald Trump’s initiatives and as a consequence the FED decisions will actually affect it.
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