It seems the Fed feels that at least one of two mandates are on track– employment. Recent payroll job gains have decelerated, averaging 173,000 per month. Although the unemployment rate has increased compared to last year, it remains relatively low at 4.2 percent as of November. Wage growth has moderated, and the gap between available jobs and workers has diminished. Overall, labor market conditions are less restrictive than those observed in 2019 and are not significantly contributing to inflationary pressures. Powell summarized in his 12/18 press conference “We don’t think we need further cooling in the labor market to get inflation down to 2 percent.”
Inflation remains the steadying factor in the Fed’s hand. With inflation approaching the Fed’s target and knowing the lagged effects of policy adjustments, it seems prudent for the committee to pause here and see how things shake out. There remains uncertainty related to inflation in that we had four months of moderation prior to September, followed by higher readings in September and October and then a resumption of moderation in November. In addition, it is difficult to quantify the impact of a tumultuous political environment in Washington. It remains to be seen the extent and magnitude of tariffs imposed and their inflationary impact, if any at all. On top of that, a deadline looms Friday for Congress to pass a Continuing Resolution bill. The odds of a partial shutdown have risen in the last few days, which could potentially stoke inflationary pressures.
December is typically a strong month following a strong year, and a strong quarter to date (see chart below). With equity markets close to all-time highs, it doesn’t take much to rattle markets if only briefly as we saw following Powell’s briefing. Big gains through November tend to be followed by a positive December as tax-loss selling is mitigated by market strength. There are simply not many tax losses to harvest. As a result, weakness begets weakness in names with losses as selling accelerates. There is also the hope for lower tax rates under the new administration, limiting the appetite for taking any gains in the remaining month of the year. And so, the market rallies further and names experiencing momentum continue to soar.
Inevitably we look to 2025. The Fed’s intentions for next year are not likely unanimous as four members (3 non-voting) wanted to leave rates unchanged. Given the rotating nature of the FOMC committee this could be a hawkish signal for next year. And the markets clearly digested Powell’s comments as hawkish. It could be argued however, that by revising unemployment lower by 1 basis point and core inflation higher by 3 basis points, the Fed effectively lowered the hurdle rate for additional cuts next year.
In terms of the economy, there are plenty of reasons for concern in 2025. There is always potential for earnings growth to slow. While Wall Street strategists are historically incorrect in terms of earnings projections, they often get them fairly right directionally. If the fourth quarter provides any insight to 2025, estimated year-over-year earnings growth for the S&P 500 is +11.8%, the highest since Q4 2021. Inflation could stop declining or even reassert itself. If inflation persists and deficits grow, yields will likely rise, diverting focus from the stock market. Questions emerge about the policies of the incoming Trump administration and possible retaliations. Geopolitical unrest could intensify and even spill over to markets economically tangential to the US. The implications for global economic growth, inflation, bond yields, and global equity performance remain to be seen. The dominant theme for 2025 seems to be uncertainty.
Full year 2025, global inflation remains a key contributor to uncertainty and likely determines much of how the Fed proceeds next year. While we have been blessed with what many call a Santa Claus rally, we know that the new year and January in particular may bring volatility and reversals in trends that drove much of 2024.
Source: FactSet, federalreserve.gov
By Kimberly Woody, Senior Portfolio Manager
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