December FOMC Update: What does this mean for 2025

What Happened? 

In its final FOMC meeting of 2024, the Fed delivered a widely expected 25 basis point cut to its benchmark interest rate. This brings the total interest rate cuts to 100 basis points for the year. 

However, what stood out to us was the committee’s acknowledgment of the economy’s surprising resilience and the potential impact of policies from the Trump administration, such as tax cuts and tariffs. In response, they raised their inflation forecast for 2025 from 2.1% to 2.5%.

What’s also notable is the adjustment to their rate-cut guidance. The Fed now expects the federal funds rate to end 2025 at 3.9%, up 50 basis points from their September projection of 3.4%. This means the Fed scaled back the number of rate cuts planned for 2025 to two, down from four initially projected. 

Source: Federal Reserve Board, Summary of Economic Projections, 18 December 2024

The Immediate Market Reaction

Markets interpreted this move as a “hawkish cut”,  leading to a broad-based negative reaction. A sell-off swept across asset classes, including equities, bonds, gold, and Bitcoin. The S&P 500 declined by -3.0%, while the Nasdaq 100 fell by -3.6% overnight. Treasury yields also moved higher across the curve, with the US 10-year yield surpassing 4.5%.

S&P 500 Index

Source: CNBC, 19 December 2024, 1PM SGT 

US 10-Year Treasury Yield 

Source: CNBC, 19 December 2024, 1PM SGT

What’s Our Take? 

  • The Fed put is still in place 

While the Fed may slow the pace of rate cuts, it remains unlikely to reverse course and raise interest rates. In fact, Fed Chair Powell’s speech struck us as less hawkish than the market seemed to interpret. 

Addressing inflation, Powell reiterated during the press conference that he still views the disinflationary trend as intact, citing cooling housing inflation and a gradually softening labor market. The projection of slower rate cuts appears to reflect caution around potential policy uncertainties under the incoming administration.

A key takeaway from 2024 is that the Fed has demonstrated its ability to react boldly and quickly to changing economic conditions, as evidenced by its actions in Q4 2024. For this reason, we don’t interpret this development as a pivot in the Fed’s overall policy direction.

  • The equity dip seems more attributable to technical selling pressure

Putting the overnight selloff into perspective, the S&P 500 has rallied +6%, and the Nasdaq 100 has gained +10% in just a month and a half since the end of October, reflecting post-election optimism. It seems that some investors took this opportunity to lock in profits.

  • For your investment portfolio: stay invested and add diversifiers  

Looking ahead to next year, while the Fed has adopted a slightly more cautious stance on rate cuts, the overall policy direction remains accommodative, which could continue to support asset prices.

For US equities, we believe the risks are fairly balanced. On the upside, potential tax cuts and deregulation may bolster already strong earnings growth. On the downside, the possibility of trade wars could dampen positive sentiment. Additionally, high valuations and relatively crowded positioning in US equities pose a risk of sudden selloffs. 

In such a market environment, it is essential to stay invested while also adding diversifiers to your portfolio.

Portfolio to Consider: Syfe Downside Protected Portfolio

Unlike traditional asset classes, the Downside Protected Portfolio employs a series of innovative ETFs that utilise option strategies to limit large losses while capturing upside potential. Since its launch in July 2024, the portfolio has demonstrated the ability to participate in market gains when the S&P 500 rises, while significantly reducing losses during pullbacks. For example, while the S&P 500 has declined by -2.6% month-to-date, the Downside Protected Portfolio has only dropped by -0.7%. This portfolio can add valuable diversification to a traditional equity-bond allocation.

Performance of Downside Protected Portfolio

Source: Syfe Research, Bloomberg. Returns are based in USD and gross of Syfe management fees. As of 18 December 2024

Learn more about the Downside Protected Portfolio today: 

Previous articleMaking the Most of SRS as a Foreigner in Singapore
Next articleSyfe Market Outlook 2025: Thriving Amid Trumponomics 2.0 and Innovation