Post-FOMC carnage: A stark shift in monetary policy outlook signals a turbulent new reality

In a dramatic turn, U.S. stocks and global markets crumbled after the Federal Reserve’s latest dot plot iteration, which only pencilled in two more cuts, down from four for the coming year. This sent shockwaves of a 'hawkish cut' across trading floors worldwide. The aftermath was brutal: 10-year Treasury yields rocketed above 4.50%, the dollar surged, smashing through key resistance levels, and the S&P 500 plummeted nearly 3.0 %, signalling a distressed market.

Since slashing rates by a bold half-point in mid-September—triggered by dipping inflation and fears of a teetering labour market—the Federal Reserve has carved a full percentage point off its benchmark rate. Yet, the economic terrain has shifted dramatically since then. The labour market has shown surprising resilience, consumer spending remains unchecked, and inflation is stubbornly perched above the Fed's target. Now ominously projected to soar to 2.5% by year's end, up from a previously estimated 2.1% in September, these figures paint a picture of an economy heating up faster than anticipated, challenging the Fed's navigational prowess in calming the economic currents.

This harrowing shift in the monetary policy outlook thrusts us into a turbulent new reality. Suppose the U.S. economy shows unexpected strength early in 2025 and confronts burgeoning inflationary pressures from President-elect Trump's audacious economic agenda. In that case, the reality is that financial markets will start to pare back expectations for further rate cuts next year to a no-cut 2025 scenario. President-elect Trump's hawkish stance on trade, immigration, and taxation injects a potent dose of volatility into the inflation narrative. Depending on their final form, these policies could intensify inflationary pressures and tighten the labour market further.

Chairman Powell has acknowledged that the Fed is actively modelling Trump’s economic proposals. Yet, these are not currently factored into the Fed's immediate decision-making due to the uncertainty about their definitive details. The landscape is fraught with hawkish risks, making the market’s outlook increasingly precarious.

Officials have adjusted their median estimate of where the policy rate will settle in the long run, nudging it up to 3% from 2.9%. This adjustment appears generous by many accounts, as their economic projections hint that the neutral rate could be significantly higher. This suggests that officials might achieve a balanced policy with fewer rate cuts than currently anticipated.

That FOMC meeting definitely put a damper on the “wealth effect” for now!