Markets had been riding high on postelection optimism, but Federal Reserve Chair Jerome Powell delivered a sobering reminder on Thursday: the fight against inflation isn’t over, and the Federal Reserve is in no rush to cut interest rates.
His comments, coupled with mixed global economic signals, sent US stocks lower and cooled enthusiasm for a December rate cut.
The Dow Jones Industrial Average fell 0.47%, the S&P 500 slipped 0.6%, and the Nasdaq Composite dropped 0.64% on Thursday. All three major indexes are on track to end the week lower, erasing gains from a postelection rally earlier in the week. Stocks that had benefited from “Trump trades” also lost momentum.
Meanwhile, in Asia, markets painted a mixed picture. Japan’s Nikkei 225 rose 0.28%, buoyed by news of third-quarter GDP growth, while China’s CSI 300 fell nearly 1%, reflecting deepening real estate sector challenges.
In remarks at the Dallas Regional Chamber, Powell emphasized that while inflation has moderated significantly from its pandemic-era highs, the Fed’s policy path remains cautious.
“We are not in a hurry to lower rates,” Powell stated.
He pointed to the strength of the US economy despite recent headwinds like hurricanes and labor strikes.
The Fed has raised rates to a range of 5.25% to 5.5%, the highest since 2001, to combat inflation, which peaked at 9.1% in mid-2022. Recent data shows inflation easing closer to the Fed’s 2% target, with October’s Consumer Price Index at 2.6% and the Personal Consumption Expenditures Index at 2.1% in September.
However, Powell cautioned that navigating rate adjustments requires careful judgment.
“The economy was overheated and has cooled down as we had hoped… But we’re navigating between moving too quickly or too slowly. Slowing the pace of rate cuts seems prudent,” he said.
Powell’s comments significantly altered traders’ expectations. The probability of a 25-basis-point rate cut in December dropped to 62.6%, down from 82.5% earlier in the day, according to the CME FedWatch tool. Analysts now question how aggressively the Fed will act in 2024, with BlackRock’s Rick Rieder predicting fewer rate cuts than previously anticipated.
“The Fed’s current policy is restrictive, though it’s unclear by how much,” Powell said.
He underscored the need for caution as the central bank nears what it considers a “neutral” rate.
Global economic data added to market jitters. Japan’s economy expanded by 0.3% year over year in the third quarter, snapping two consecutive quarters of decline. In contrast, China’s retail sales rose 4.8% year over year in October, but the country’s real estate investment fell by 10.3%—its steepest drop in nearly two years.
The postelection euphoria is fading as investors refocus on inflation, interest rates, and global economic uncertainty. Powell’s remarks underscore the delicate balance the Fed must strike to achieve a “soft landing” for the US economy. For now, disinflation remains a “bumpy path,” and the trajectory of rates is anything but linear.
“The strength we are currently seeing in the economy gives us the ability to approach decisions carefully,” Powell noted.
For investors, that means navigating an increasingly volatile landscape with measured caution.
CNBC and FOX Business contributed to this report.
