December 21, 2024 Market Update

It was a tumultuous week on Wall Street, with stock prices falling sharply on Wednesday following the Federal Reserve’s latest interest rate guidance, discussed further below. The Dow Jones Industrial Average plummeted by over 1,100 points that day and endured its longest series of daily losses since October 1974. Similarly, the S&P 500 fell by nearly 3%, and the Nasdaq Composite dropped 3.6%. Prices stabilized later in the week, but all the major indexes, including the Dow Jones, Nasdaq Composite, and S&P 500, lost over 1.5% for the week.

The hawkish tone of the Fed’s announcement also triggered a significant sell-off in longer-term bonds, driving yields sharply higher. Both the 10-year and 30-year Treasury yields surged on Thursday to their highest levels since May before normalizing slightly but remained up for the week.

The Federal Reserve’s Open Market Committee cut its primary policy interest rate by a quarter point last Wednesday, its third and final rate cut for 2024.  The federal funds target range now sits at 4.25% to 4.5%, a full percentage point below where it stood in September when the current rate-cutting cycle began.

While last week’s decision surprised virtually no one, there is far less consensus about what the Fed might do next.

Recent data suggests inflation is stickier and the economy is stronger than Fed officials had anticipated when they began cutting rates in September.  As a result, some market observers believe the Fed will slow or pause rate cuts in 2025.

Others expect the labor market to weaken and the economy to lose momentum in 2025, pushing the Fed to accelerate rate cuts.  The recent rise in the dollar could also trigger more aggressive rate cuts if that strength puts pressure on American exports, creates deflationary forces, or contributes to global instability. 

In his post-meeting press conference Fed Chair Jerome Powell said the Fed will be taking a more cautious approach towards further cuts.  “We have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive,” Powell said.  “We can therefore be more cautious as we consider further adjustments.”

The Federal Open Market Committee now expects faster economic growth, lower unemployment, and higher inflation than it had when it began cutting rates in September.  As a result, it is now forecasting just two rate cuts for 2025.  That is down from the four rate cuts the Committee was expecting next year when they met last September.

With Christmas just around the corner and New Year’s Eve shortly thereafter, this will likely be my final market update for the year.  Rest assured, though, that if anything significant happens, I will be sure to let you know.

That’s all for now.  Happy holidays, and invest wisely, my friends.