Interview, Fireside Chat, Roundtable
Markets post-Fed: Inflation back in focus
- Fed Policy Shift
- The Federal Reserve delivered a 25 basis point rate cut, marking the completion of "Phase One" (100 basis points cut over three meetings).
- A hawkish surprise emerged via the dot plot, which indicated a "firm two" dots camp, signaling fewer anticipated cuts than previously priced.
- Officials have shifted to "Phase Two," characterized by a cautious, data-dependent approach to further easing.
- Future rate moves will depend on concrete progress of inflation down to the 2% target, which currently sits around 2.75% and appears locally stalled.
- The Fed intends to wait for more clarity on the policy landscape and the ultimate neutral rate before committing to further cuts.
- Josh Schifrin forecasts 2 to 3 cuts in 2025, with the first likely occurring in June, barring a sharp deterioration in the labor market.
- Don Wilson anticipates the Fed may deliver three cuts in 2025, contingent on inflation cooling and no negative economic surprises.
- The market's pricing of a single 2025 cut leaves the economy vulnerable to any sign of cooling inflation or unemployment weakness that could reignite easing narratives.
- A new Federal Reserve Chair is expected to be appointed in Spring 2026, likely shifting market focus toward leadership direction in 2025.
- Inflation and Economic Outlook
- Inflation data shows residual seasonality risks and a mix of hot and cool readings, suggesting a slow convergence toward lower rates rather than a V-shaped recovery.
- Core PCE inflation is projected to fall below 2.5% by this time next year, absent significant tariff-induced shocks.
- Underlying inflationary pressures, particularly in housing and rental costs, are showing signs of cooling.
- Tariffs and potential immigration policy changes remain the primary wild cards that could accelerate inflation or disrupt the current trajectory.
- The current economic balance leans slightly toward growth risks over inflation risks, though neither is weighted as high.
- Market Strategy and Risk Assets
- Post-election sentiment has largely been "priced in," making equities vulnerable to negative surprises rather than a continuous news-driven rally.
- The market has unwound some post-election froth, particularly in policy beneficiaries like small-cap stocks (Russell 2000) and specific regional banking sectors.
- Upside now depends more on economic data and corporate performance, as the Fed is less likely to provide immediate policy support.
- The "Fed Put" remains active, serving as a floor for downside risks but not a catalyst for incremental upside.
- Financial sector runways appear improved compared to pre-election levels, benefiting from anticipated deregulation.
- 2025 Thematic Forecast
- Dominic Wilson: Identifies 2023 as the "year of disinflation," 2024 as the "year of U.S. growth resilience," and forecasts 2025 as the "year of policy volatility."
- Josh Schifrin: Labels 2023 as the "year of AI," 2024 as the "year of the soft landing," and predicts 2025 will be defined by significant policy shifts including tariffs and tax reform.
- Tony Pasquarello: Suggests 2023 was the "battle against inflation," 2024 was the "relief from a hard landing," and 2025 will continue the trend of "U.S. exceptionalism" despite potential volatility.
- January 2025 Outlook
- Trade policy, specifically tariffs, is expected to dominate market discourse in the first quarter, potentially before tax reform or other initiatives.
- The early months of the new administration are expected to face execution challenges, leading to a "bumpy" delivery of policy priorities.
- Market behavior in January is anticipated to be "binary" and "high velocity," with traders reacting to a stream of headlines regarding tariffs and immigration.
- Deregulation is expected to act as a "carrot" to offset potential negative market impacts from trade policies.
- The first week of January is projected to be quiet, with significant action likely to resume after the 20th.
- European Equities
- Don Wilson expresses a strong negative bias toward European equities but notes a contrarian tendency to expect a rebound, potentially seeing the DAX rise 25% in 2025.