Just when we thought we’d get a quiet end to the year, the Federal Reserve held their last rate announcement this week. While the rate announcement was in line with expectations (another 0.25% rate cut was confirmed, taking the current range to 4.25-4.5%), the commentary in Jerome Powell’s press conference and the data accompanying the Fed’s decision caused both equity and fixed income markets to react very poorly.

What exactly happened? The Federal Reserve changed their future projections. Powell himself said “from here it’s a new phase and we’re going to be cautious about rate cuts.” They now see fewer interest rate decreases in 2025 (than they did just three months ago). The reasons for this? Stronger than expected economic data and stubborn inflation, as well as some concerns over the impact to the new administration’s policies (including tariffs).

The Fed’s projections now show a decline of only 0.5% next year (prior forecast had been a full percent). Looking to years beyond 2025, Fed officials see a slow and gradual cycle of rate cuts (another 0.5% in 2026 and 0.25% in 2027). All of this indicates far less urgency on the Fed’s part to dial back their restrictive rate policy.

Markets reacted very negatively to these changes, with equity indexes falling 3-5% on the day and interest rates spiking (bringing down bond values). It appears the moves to the downside may have been somewhat overdone for some technical reasons (which we won’t delve into too deeply and time will tell if that is in fact the case). The most important takeaway I had from this announcement is the Federal Reserve remains dovish (ie: in favor of lowering interest rates). Yet, they simply have far less visibility into 2025 at this time given recent inflation readings and the election results. With that lower level of uncertainty, they took action to notify markets and investors that rate cuts will be far less predictable than previously expected. But again, rate cuts are coming which remains supportive of both bond and equity prices over the longer-term.

Certainly not a nice & calm way to end 2024 and say hello to the new year – but we still have a few trading days left and as we know, anything is possible!

Before we leave this year behind, I’d encourage you to take a moment and reflect on what this year has brought from an investing perspective. It has been a truly exceptional year – one that very few were expecting but one that all should be grateful for. I know I am.

Wishing you are yours a wonderful holiday season! See you back here in the new year.

Onward we go,