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Following what was a head spinning rally after Trump’s victory in the presidential race and a uneventful press conference after the FOMC cut rates by the expected 25 basis points, equity prices pulled back last week. Apart from markets taking a technical breath following the rally, crashing from the sugar high was fueled by a series of Fed speakers, capped by Chair Powell’s remarks. Powell and others gave the impression that a December rate cut is less likely than investors had anticipated, signaling a more cautious approach to easing policy to avoid turning sticky inflation into accelerating inflation in an economy that remains resilient.
As detailed below, economic data from the week reinforced this narrative of stable economic growth and sticky inflation. Retail sales data indicated that consumers remain steady and continue spending as the holiday shopping season nears. The Consumer Price Index (CPI) came in line with economists’ expectations but remains above the Fed’s target levels. This is especially evident in Core CPI, which is often a better gauge of future inflation trends.
The pullback in equity markets was led by declines in the Healthcare and Technology sectors. However, Financials and Energy stocks managed to end the week higher despite the broader retreat.
The key takeaway – With the latest CPI report meeting economists’ expectations, inflation remains stable but above the Fed’s target for yet another month. Fed officials have repeatedly noted in recent months that the risks associated with their dual mandate, promoting maximum employment and stable prices, are now more balanced. While this is a less precarious position compared to two years ago, when inflation was rampant, it presents new complexities. The risk of a policy misstep on either side of the mandate has become more pronounced.
If the Fed cuts rates too aggressively, the risk of inflation reaccelerating becomes a larger concern. Conversely, if rates are kept too high for too long, economic strain could lead to declining employment. Given the current state of relatively loose financial conditions, the Fed appears more inclined to hedge against inflation risks by proceeding cautiously when considering rate reductions.
The key takeaway – Powell’s remarks reflected a more cautious stance on the Federal Reserve’s current rate-cutting cycle. His most notable comment, “The economy is not sending any signals that we need to be in a hurry to lower rates,” underscored the Fed’s measured approach. As long as economic data continues to show a resilient U.S. economy without significant growth concerns, the central bank appears less inclined to aggressively loosen policy than previously anticipated.
Markets reacted sharply to Powell’s comments, with the odds of a December rate cut dropping from 98% to 58%. Expectations for the rate path through 2025 have also shifted, as traders now anticipate a slower pace of rate reductions over time.
The key takeaway – The U.S. economy continues to show resilience, with October’s retail sales figures reinforcing the strength of American consumption—a positive sign as the holiday season approaches. Notably, discretionary spending in areas like restaurants and automobiles suggests that consumers feel confident in their financial situations. This sense of security, supported by robust employment data, provides a strong foundation for sustained spending, which in turn helps drive economic momentum.
The next two months will be critical in gauging consumer sentiment, as holiday spending patterns will offer deeper insights into whether this confidence can persist and continue supporting economic growth.
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