"Wait, stocks go down?"
J. Powell hints at pausing interest rates in 2025 with a 'hotter than expected' economy
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What is happening to stocks and interest rates right now?
Written by Logan Shearer:
On Wednesday, December 18th The Federal Reserve cut rates 25 basis points for a range of 4.25-4.5% compared to the previous range of 4.5-4.75% All four indices were down with the dow down a little over 2.5% the S&P down nearly 3% the Nasdaq down just over 3.5% and The Russell 2000 down over 4% (ouch, my small caps).
A quick aside on those ranges. The federal reserve buys and sells government securities like treasury bonds in the open market to influence rates.But the federal reserve is not setting one rate it will lend at. They are simply buying and selling bonds to keep interest rates within a band.
What gives? One word: Guidance. The market had priced in the possibility of four interest rate cuts in 2024. In essence in December 2025 the projected range was 3.25-3.5% but expectations seem to have shifted to the higher expected range of 3.75-4%
Chairman Jerome Powell cited the recent uptick in inflation coming in at 0.3% month over month vs 0.2% annualized, however Core CPI (which excludes food and energy prices) met expectations at 0.3% in essence food and energy prices are elevated compared to expectations. He is exercising caution, saying that the fed is slowing down just like a safe driver in thick fog. He has concerns over the potential impact of tariffs (and has had other scuffles with the president-elect). However, it appears that in the medium and long terms the economy is readjusting well in a post pandemic world that turned the global economy on its head.
This could be a good time to get in on high-quality companies, ones based on hard assets (like railroads and other infrastructure) and especially other capital light companies with strong balance sheets.
It is important to remember as well that while most companies are going to react to market news the two big money makers long term are buying quality on a correction or buying durability. Ultimately, today was about forward guidance related to uncertainty, but buying companies at fair prices that have a secular tailwind are going to protect and empower your portfolio.
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