Stock sales on Wall Street were “healthy,” as the Federal Reserve’s warning about future rate cuts gave investors a “reality check,” according to Jeremy Siegel, a professor emeritus of finance at the University of Pennsylvania’s Wharton School.
The US Federal Reserve cut interest rates by a quarter point at its final meeting of the year, taking its overnight lending rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee indicated it would cut rates only twice by 2025, which is less than the four cuts indicated in its September forecast.
All three major indexes on Wall Street sank due to the Fed’s revised stance, as investors were betting on the central bank to remain aggressive in lowering borrowing costs.
“The market [had been] almost on the run… and this put them in the reality that we’re just not going to get low interest rates” as investors were betting when the Fed began its easing cycle, Siegel told CNBC’s “Squawk Box Asia.”
“The market was overly optimistic…so I’m not surprised by the sell-off,” Siegel said, adding that he expects the Fed to scale back the number of rate cuts next year, with just one or two cuts.
There’s also a “chance to be undecided” next year, he said, as the FOMC raises its inflation forecast going forward.
The new Fed projections show that officials expect the price index for personal consumption expenditures, excluding food and energy costs, or core PCE, to remain elevated at 2.5% through 2025, still well above the 2% target.
Siegel suggested that some FOMC officials may be concerned about the effects of inflation on potential costs. President-elect Donald Trump has vowed to implement additional tariffs on China, Canada and Mexico on the first day of his presidency.
But the actual numbers may not be “as big as the market fears,” Siegel said, as Trump could look to avoid any pullback in the stock market.
Market participants now expect the Fed to not cut rates until it meets in June, with rates at a 43.7% chance of a 25 basis point cut by then, according to CME’s FedWatch tool.
Marc Giannoni, Barclays US economist, kept the bank’s basic forecast of only 25 percentage point cuts by the Fed next year, in March and June, while fully including the effects of tax increases.
Giannoni said he expects the FOMC to resume further rate cuts in mid-2026, after inflationary pressures dissipate.
Data released earlier this week showed US inflation rose at the fastest pace of the year 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 core consumer price index rose 3.3% year-on-year in November.
“It’s a real surprise to everyone, including the Fed, given how high short-term rates are relative to inflation, that the economy can stay as strong as it is,” Siegel said.
The Fed has entered a new phase of monetary policy – the pause phase, said Jack McIntyre, portfolio manager at Brandywine Global, adding that “if it persists, it is more likely that the markets will find equal amounts of rate hikes compared to rate cuts. .”
“Policy uncertainty will create volatile financial markets in 2025,” he added.
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