January Economic Update
Market Summary
The Federal Reserve shook up the markets last month by trimming expectations for future interest rate cuts which caused pullbacks for most of the major US stock indices. The large cap S&P 500 gave up -2.5%, the Nasdaq 100 managed to squeeze out a 0.39% gain, while the small cap Russell 2000 retreated -8.4% to wrap up the last month of the calendar year. (1)
The Federal Reserve and Interest Rates
The Federal Reserve took center stage for the markets last month when they announced a more “hawkish” tone regarding the pace of interest rate cuts for 2025 as well as increasing concerns over inflation data, which we have mentioned several times over the past few months in our newsletters.
The Fed’s forecast was raised to 2.5% up from 2.1% for year-end 2025 inflation measured by the Personal Consumption Expenditures (PCE) index, which is the Fed’s preferred measurement for price increases. This prompted Fed officials to lower estimates for interest rate cuts next year. Previous projections were four quarter point reductions throughout 2025 which have now been halved to only two quarter point cuts. Regarding these projections, Fed Chair Jerome Powell stated, “driving the slower rate-cutting path is high inflation this year and next year” going on to further state that, “higher inflation is probably the biggest factor for the new projections.” As for the Fed’s goal of 2% inflation, Powell stated that it may take “another year or two” for inflation to cool down to their target level. (2)
The impact of potential Trump-imposed tariffs was also discussed at the Fed’s press conference. Powell conceded that it is premature to make any conclusions regarding the impact of tariffs, but the committee is researching the potential ramifications such policy moves could have on domestic inflation. (2)
After the announcement, the market began pricing-in 0.25% to 0.37% total interest rate cuts for 2025, even though the forecast called for a total of 0.50% rate reductions. This was in part due to several Fed officials projecting 0.25% or less for total rate cuts next year. This would maintain short-term interest rates above 4% into 2026, far longer than the market had been anticipating. (5)
Looking Forward…
January could be a choppy month as the markets continue to digest the Federal Reserve’s comments while looking for further guidance during January’s Fed meeting. Currently, there is only a 7% chance there will be another interest rate cut this month, but the anticipation will be in the updated inflation metrics and any further hawkish comments by Powell.
On the political front, we will have the first couple of weeks of the Trump regime part II with republicans taking over the house and senate. We expect more chatter regarding tariffs to come out of the White House during that time which could provide more insight regarding the scope, extent, and timing of tariff implementation.
Monthly Financial Tip:
Buying a new car means buying a rapidly depreciating asset. Buying a quality used car is often the better financial option.
Citations:
1. Charles Schwab, December 31, 2024
2. Federal Reserve, December 18, 2024
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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