Stock sell-off after Fed rate cut healthy

Stock selling on Wall Street was “healthy” as the Federal Reserve’s cautious projection of future rate cuts gives investors a “reality check,” according to Jeremy Siegel, professor emeritus of finance at Wharton School of the University of Pennsylvania.

The US Federal Reserve cut interest rates a quarter of a percentage point at its last meeting of the year, taking its overnight rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee indicated it will likely cut rates only two more times in 2025, down from the four cuts outlined in its September forecast.

All three the main Wall Street indexes plunged in response to the Fed’s revised outlook, as investors had been rooting for the central bank to remain more aggressive in reducing borrowing costs.

“The market (had been) in an almost out-of-control situation … and that drove them to the reality that we’re not going to get interest rates that low,” as investors were betting when the Fed began its easing cycle, Siegel told CNBC. “Squawk Box Asia.”

“The market was too bullish … so I’m not surprised by the sell-off,” Siegel said, adding that he expects the Fed to reduce the number of rate cuts next year to just one or two cuts.

There is also “the possibility of not cutting” next year, he said, as the FOMC raised its inflation forecast for the future.

New Fed projections show officials expect the price index for personal consumption expenditures excluding food and energy costs, or core PCE, to will remain high at 2.5% until 2025still significantly higher than the central bank’s 2% target.

Siegel suggested that some FOMC officials may have considered the inflationary impacts of potential tariffs. President-elect Donald Trump has pledged implement additional tariffs in ChinaCanada and Mexico on the first day of his presidency.

But the actual tariffs may not be “anywhere as big as the market fears,” Siegel said, given that Trump would likely try to avoid any stock market pullback.

Market participants now expect the Fed to do so not cut rates until their June meetingwith a 43.7% chance of cutting by 25 basis points at that time, according to the CME’s FedWatch tool.

Marc Giannoni, chief U.S. economist at Barclays, maintained the bank’s benchmark projection of just two 25-basis-point rate cuts by the Fed next year, in March and June, while fully incorporating the effects of tariff increases.

Giannoni said he expects the FOMC to resume incremental rate cuts in mid-2026, after inflationary pressures from the tariff dissipate.

The data was released earlier this week US inflation rose at a faster annual rate in November, with the consumer price index showing a 12-month inflation rate of 2.7% after rising 0.3% in the month. Excluding volatile food and energy prices, the basic consumer price index rose 3.3% year-on-year in November.

“It’s a realization and a surprise to everyone, including the Fed, that given how high short-term rates have been relative to inflation, the economy can stay as strong as it is,” he said. added Siegel.

The Fed has entered a new phase of monetary policy: the pause phase, said Jack McIntyre, portfolio manager at Brandywine Global, adding that “the longer it persists, the more likely markets will have to price of a rate hike versus a rate cut.” .”

“Political uncertainty will make financial markets more volatile in 2025,” he added.