Stock sell-off after Fed rate cut healthy

The stock sell-off on Wall Street was “healthy,” as the Federal Reserve’s cautious projection of future rate cuts offers investors a “reality check,” according to Jeremy Siegel, professor emeritus of finance at the Wharton School. from the University of Pennsylvania.

The US Federal Reserve cut interest rates by a quarter of a percentage point at its last meeting of the year, bringing its overnight borrowing rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee indicated it will likely only lower rates twice as much in 2025, less than the four cuts indicated in its September forecast.

Wall Street’s three major indexes sank in response to the Federal Reserve’s revised outlook, as investors had been betting that the central bank would remain more aggressive in reducing borrowing costs.

“The market (had been) in an almost runaway situation… and this brought them to the reality that we are simply not going to get interest rates as low” as investors were betting on when the Federal Reserve began its easing cycle, he said Siegel told CNBC. “Asian Squawk Box”.

“The market was overly optimistic… so I’m not surprised by the sell-off,” Siegel said, adding that he expects the Federal Reserve to reduce the number of rate cuts next year, with only one or two reductions.

There is also “the possibility of no cuts” next year, he said, as the FOMC raised its inflation forecast going forward.

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

Siegel suggested that some FOMC officials may have taken into account the inflationary impacts of potential tariffs. President-elect Donald Trump has promised to implement additional tariffs on China, Canada and Mexico from the first day of his presidency.

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

Market participants now expect the Federal Reserve will not cut rates until its June meetingpricing a 43.7% chance of a 25 basis point cut at that time, according to CME’s FedWatch tool.

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

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

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

“It is a realization and a surprise to everyone, including the Federal Reserve, that given how high short-term rates have been relative to inflation, the economy can remain as strong as it is,” Siegel added.

The Federal Reserve 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 equally value a rate increase or a rate cut. “.

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