Federal Reserve Chair Jerome Powell played a central role in a whirlwind week on Wall Street. However, the decision by the Fed to pause further interest rate cuts now appears prudent, given a key inflation metric and ongoing budget tensions in Washington.
“The November personal income data reinforces the Fed’s decision to pause,” noted Steve Blitz, chief U.S. economist at TS Lombard, in a Friday commentary. He also pointed to the House’s challenges in passing a spending bill to prevent a government shutdown as further validation: “Negotiations with the Trump administration will be critical over the next two years.”
Markets saw sharp volatility midweek following the Fed's anticipated rate cut, coupled with its signal of fewer rate cuts for 2025 than previously projected. By the end of Wednesday, the Dow Jones Industrial Average had plummeted over 1,100 points, marking a 10-day losing streak—the longest in half a century. The S&P 500 recorded a 3% drop, its worst Fed Day performance since 2009, while the Nasdaq Composite declined by 3.6%.
Curiously, as Peter Boockvar, chief investment officer at Bleakley Financial Group, observed, the bond market had already anticipated the Fed's outlook. Investors likened to the character in When You Give a Mouse a Cookie, adjusted expectations even further, slashing their projections for rate cuts.
Investor skepticism was partly fueled by the Fed’s acknowledgment of persistent inflation, following unexpectedly high figures in September and October. “We’ve faced year-end inflation projections that haven’t held up as we approached the year’s end,” Powell admitted during a press conference.
Friday’s November personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, carried added significance. While generally predictable due to preceding consumer and producer price data, the PCE reading ultimately came in slightly cooler than expected. Core PCE rose 2.8% year-over-year in November, matching October’s figure.
The report sparked relief in the markets, triggering a rally. Chicago Fed President Austan Goolsbee’s comments on television further buoyed optimism. Goolsbee suggested inflation remains on track to hit the Fed’s 2% target and predicted that interest rates could decrease significantly over the next 12 to 18 months.
Despite Friday’s gains, equities finished the week lower. The Dow climbed nearly 500 points, or 1.2%, while the S&P 500 and Nasdaq gained 1% and 1.1%, respectively.
Krishna Guha of Evercore ISI noted that the PCE data—highlighting softness in non-housing services and marginally negative goods—supports the Fed’s stance. “The inflation trajectory remains on course, albeit with occasional bumps,” Guha wrote, adding that further confirmation could lead the Fed to begin cutting rates in March and signaling more reductions by June.
Meanwhile, political uncertainty added to the market's challenges. Tesla CEO Elon Musk, the world’s richest person, led opposition to a bipartisan effort to prevent a government shutdown. The resulting scramble for a temporary funding measure before the deadline on Saturday heightened investor unease in the wake of the Fed’s final 2024 meeting.
Kent Engelke, chief economic strategist at Capitol Securities Management, downplayed the budget drama’s immediate market impact but warned of tougher battles ahead as the government grapples with funding growing deficits.
Economic data for November continued to show renewed inflation in core goods and services, excluding housing and energy. Blitz tied this trend to a rebound in private-sector employment over recent months. Rising real wages are fueling discretionary spending, while households maintain significant savings despite a lower savings rate.
“With the economy in a slow rebound and disinflation showing signs of stabilizing, the Fed’s decision to hold steady is justified,” Blitz concluded. “The coming months will determine whether a cohesive growth strategy emerges from the Trump administration.”
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