Jerome Powell has asserted his authority over Donald Trump.
Jerome Powell has asserted his authority over Donald Trump.
In a press conference on Wednesday, Federal Reserve Chair Jerome Powell asserted his authority, stating that inflation will persist higher than anticipated next year and that the Fed now anticipates only two rate reductions in 2025, as opposed to the four anticipated in its September projection.
The market reacted negatively to this news, with the S&P 500 falling 3% and the Dow losing over 1,100 points, marking the tenth consecutive daily decline – the longest such streak since 1974.
The Fed's revised rate and inflation forecasts served as a "slap in the face" to markets, according to Art Hogan, managing director and chief market strategist at B. Riley Investments. This revelation prompted widespread anxiety.
As a result, the post-election stock market surge, which had led to a near 2,800-point increase in the Dow, has been largely erased. At the close of Wednesday's trading, the Dow boasted a mere 100-point gain since Trump's reelection.
No Easy Victories
Although investors had eagerly anticipated the quarter-point rate reduction the Fed announced, they were taken aback by the central bank's 2025 forecast. For markets, fewer rate reductions could translate into lower-than-expected income, decreased hiring, and a weaker-than-projected economy.
Some were convinced that Trump's election victory would usher in an era of prosperity for Wall Street, with tax cuts and deregulation aplenty. However, Jerome Powell's recent remarks served as a reminder that success rarely comes easily.
Callie Cox, chief market strategist at Ritholtz Wealth Management, reflected on the market's post-election rally, asserting that it had been difficult to fully trust this surge. "Investors dismissed valuable context and solely focused on policy speculation," she explained.
More recently, some of the optimism surrounding Trump's promised policies, such as widespread tariffs, has begun to wane.
Hogan noted that this last phase of growth will be more arduous than anticipated.
What's Next?
In fact, the bond market had predicted this very outcome much earlier – even before the Fed's announcement. Treasury yields had been on the rise as bond prices plummeted in the weeks leading up to Trump's reelection, and this trend has persisted ever since.
Increased tariffs and mass deportation policies could potentially drive inflation higher, thereby stifling the Fed's efforts to reduce interest rates. Additionally, the announcement of further tax cuts and deficit spending could result in an influx of new Treasury bonds, making it easier for the incoming Trump administration to fund its projects.
While stock investors had been aware of these potential developments, they had hesitated to sell, hoping that the stock rally would continue unabated. Nevertheless, they ultimately decided to cash in some profits, acknowledging that FOMO (Fear of Missing Out) often leads to damaging investment decisions.
Markets are expected to exhibit a degree of recovery on Thursday, potentially bringing an end to this prolonged losing streak. However, investor sentiment appears to be stabilizing, with a heightened focus on the Fed instead of Trump's policies.
As Rob Haworth, senior investment strategist at US Bank Wealth Management, asserted, "The Fed wields an unparalleled ability to influence markets among American institutions." And on Wednesday, it seemed as though Powell was underscoring this power by reminding Trump, "I'm in charge."
Businesses may need to reevaluate their investment strategies, as the Fed's revised forecast of fewer interest rate reductions could impact their income and hiring plans. Investors who had high expectations for post-election prosperity in the business world may need to adjust their strategies, as Jerome Powell's remarks serve as a reminder that success in business and investing often comes with challenges.