Close Call' FOMC Followed by Santa Rally... Will It Continue into Next Year? < Video < Article

※ This content was broadcast on the 'Economy ON' program of Yonhap News TV at 4 PM on December 26 (Thursday). (Featuring: Si Yoon Yoon, Yonhap Infomax reporter, Hosted by: Yong Wook Kwon)

[Anchor Yong Wook Kwon]

Last week, at the year's final Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) cut the benchmark interest rate by 25 basis points as the market expected. However, the market was greatly shaken by the so-called 'hawkish cut' shock. The interest rate forecast for next year has also risen significantly. A week has passed since the FOMC. How is the market digesting the Fed's material?

[Reporter Si Yoon Yoon]

Yes. On December 18 local time, the Fed cut the benchmark interest rate by 25 basis points. However, the market reacted more to the Fed's stance than to the rate cut itself.

Looking at the flow one week after the FOMC, the three major indices in the U.S. stock market all plunged by about 2-3%, and the dollar value rose to its highest level in two years. As expectations for a slowdown in the pace of rate cuts increased, U.S. Treasury yields rose, causing bond prices to plummet to 'seizure' levels. The 10-year U.S. Treasury yield surged by more than 11 basis points in a single day after the FOMC and is now fluctuating above 4.6%, the highest level in 7 months since late May.

In the dot plot, the number of rate hikes for next year was halved from the previous 4 to 2, shocking the market.

In particular, there was only one dissenting vote, but Chairman Powell actively conveyed the atmosphere of the meeting, mentioning that it was a close decision, a 'close call'.

[Anchor]

Yes, the rate was cut, but the market was shocked by the signal that the pace of cuts would slow from next year. Who was the member who cast the dissenting vote on the rate cut this time?

[Reporter]

It was Beth Hammack, President of the Federal Reserve Bank of Cleveland. The phrase 'close decision' mentioned in Powell's press conference is confirmed in Hammack's statement. She said, "If inflation remains above 2% for too long, there is a risk that the anchor of inflation expectations will be loosened, making it more difficult to bring inflation back to our target."

She also emphasized that monetary policy should be maintained "somewhat restrictively for a while" and that "I prefer to maintain the policy." Moreover, in this meeting, there were more members who argued for maintaining the rate than the one who officially cast a dissenting vote.

Looking at the Summary of Economic Projections released by the Fed, the interest rate forecast for the end of this year remained at 4.375%, the same as three months ago, but 4 out of 19 total participants in the dot plot submitted 4.625%, which is 25 basis points higher. This means that while only the Cleveland Fed President cast a dissenting vote in the actual vote, there were three more non-voting members who opposed the rate cut. Ultimately, this implies that maintaining the rate was also seriously considered, which is why the market reacted strongly.

[Anchor]

The neutral rate, which indicates the final interest rate target, has also risen, hasn't it?

[Reporter]

Yes, particularly the estimate of the neutral rate, marked as 'longer run', rose from 2.875% three months ago to 3%. The neutral rate estimate has been raised for the fourth consecutive time since last March, and it has reached 3% for the first time since September 2018. Ultimately, senior Fed officials are leaning towards an increase in the neutral rate. The level of interest rates that neither constrains nor stimulates economic growth has risen from previous levels. Looking at IB forecasts for the Fed next year, JP Morgan expects a 75bp cut next year, while Societe Generale anticipates a 25bp cut per quarter next year.

[Anchor]

The Fed has raised its forecasts for growth rates and inflation, and the dot plot shows a reduction in the expected number of rate cuts for next year. Now the market is even looking at the possibility that the Fed might raise rates next year, right?

[Reporter]

That's right. With the upward revision of the U.S. third-quarter economic growth rate and GDP increasing by 3.1% on an annual basis, the grounds for rate cuts are gradually weakening.

U.S. inflation has been increasing its upward momentum in recent months, with consumer prices rising 2.7% in November. This is slightly higher than the annual 2.6% from the previous month. As inflation indicators have been above the Fed's target for a long time, financial markets are increasingly seeing the possibility that the Fed might maintain rates or even raise them next year.

Nick Timiraos, a Wall Street Journal reporter known as the Fed's unofficial spokesperson, accurately predicted this before the December FOMC, stating on his X account, "Given current market expectations for cuts, the path of least resistance would be to cut rates by 25bp and then send a strong signal through new economic projections that the pace of rate cuts will slow."

According to the Chicago Mercantile Exchange, the possibility that the Fed won't cut rates at all next year has grown even larger. The probability that rates will remain at current levels until December 2025 has risen from about 6% at the beginning of this month to over 19% as of this morning. Also, the possibility of the Fed maintaining rates next month has overwhelmingly increased to over 91%.

RBC Capital Markets predicted in a report, "If the Fed 'skips' January, we can't be sure they'll actually start (cutting) again."

Torsten Slok, chief economist at Apollo Global Management, pointed out, "There's about a 40% chance that the Fed will raise rates again in 2025," adding, "The risk of the Fed having to raise rates in 2025 has increased due to economic improvement along with the possibility of tax cuts, tariff increases, and immigration restrictions."

[Anchor]

Yes, although the market was greatly shaken by the Fed shock, now as we enter the end of the year, market attention is shifting to the Santa rally. The S&P 500 index, which had plunged nearly 3% on December 18 when the FOMC was held, rebounded by over 1% on the 20th and then rose for three consecutive trading days until Christmas Eve. A week after the FOMC, can we expect a rally until the end of the year?

[Reporter]

The market seems to be re-immersing itself in expectations of a Santa rally. The Santa rally refers to the phenomenon where U.S. stock indices rise from just before Christmas, through the end of the year, and into the beginning of the next year.

On December 20, the three major indices all rose together for the first time in 11 trading days since the 5th, showing a rally until Christmas Eve. In particular, tech stocks, centered around the 'Magnificent Seven' stocks, continued to lead the index rise as the core group. Nvidia's stock price surged by 3.69% on the 23rd, the largest increase since November 19, and rose for four consecutive trading days until Christmas Eve. Broadcom also surged by 3.15%.

Tesla jumped by 7.35% ahead of Christmas. Previously, Tesla's stock price had set new record highs for three consecutive days until the 17th, closing at $479.86, and even reached $488.54 during trading on the 18th, setting a new high, before plummeting after the FOMC.

According to the Stock Trader's Almanac, since 1969, the S&P 500 index has risen an average of 1.3% between the last five trading days of the year and the first two trading days of January. Historically, this means that buying sentiment is strong during the last trading days of the year.

However, given the Fed's hawkish stance, market views are divided on whether the Santa rally can continue into next year.

[Anchor]

Now we can't help but look at the 2025 stock market outlook. With the inauguration of the Trump administration's second term next year, new tariff policies, interest rate cuts, and other issues that the global financial market is focusing on, is the U.S. stock market outlook still good?

[Reporter]

Yes. As the U.S. stock market continues its long-term rally, expectations for 'American exceptionalism' are being maintained. Of course, if the Fed's rate cuts continue as the market expects, improved corporate earnings, expansion of facility investment base, and activation of mergers and acquisitions (M&A) are expected to act as momentum for U.S. stock price increases.

Wall Street expects major stock indices to rise about 10% from current levels due to solid economic growth and interest rate cuts. There are also forecasts that the S&P 500 index will reach 7,000 next year. Based on the closing price on the 24th, this suggests an additional upside potential of 15.8%.

Goldman Sachs and JP Morgan have set their S&P 500 index targets for the end of next year at 6,500, while Deutsche Bank has set it at 7,000.

JP Morgan expects the net profit of 493 companies, excluding the 'Magnificent Seven' (Nvidia, Apple, Microsoft, Meta, Amazon, Alphabet, Tesla), to increase by 11.4% next year. Tom Lee, founder of Fundstrat and a representative bull on Wall Street, predicted that the S&P 500 index could rise to 7,000 in 2025 before falling to 6,600 by the end of next year.

[Anchor]

If the U.S. stock market rally continues into next year, it would be a bull market for three consecutive years. There are also forecasts that a bubble burst is imminent, right?

[Reporter]

Yes, that's right. As the S&P 500 index has risen more than 20% for two consecutive years, continuing the bull market, correction signals are also appearing. In fact, since 1947, there have been 11 cases where the index continued a bull market for more than two full years, and in the third year, when it fell, the decline was significant.

According to Sam Stovall's analysis from CFRA Research, out of these cases, the market continued to rise in the third year 6 times, and ended in decline 5 times. Of the 5 times it declined in the third year, 2 times the decline was less than 10%, but 3 times the decline exceeded 20%, falling into a bear market. Even Tom Lee, who always predicts a bull market, forecasts that stock prices may undergo a correction in the third year of the rally. Tom Lee worries, "Tariffs are the biggest risk in 2025, and there's also a possibility that enhanced government efficiency could lead to spending cuts that impact the economy."

[Anchor]

There are also policy variables in the Trump administration's second term starting next year.

[Reporter]

That's right. The Trump variable is also important. The impact will be noteworthy if Trump takes office as president from January next year and high-rate tariff policies on Mexico, Canada, and China become a reality. Bank of America pointed out that while most of the expected policy shifts would be positive for U.S. stocks, timing and the world's reaction are key.

Deutsche Bank noted that during Trump's first administration, tax cuts and deregulation were implemented first, followed by tariff increases, stating, "We expect a similar order this time, with U.S. growth as the top priority."

However, if Trump's tariffs and mass deportation of immigrants make the labor market difficult, stimulating inflation, it could prompt Fed rate hikes, which is expected to be an important market variable next year.

(Yonhap Infomax International Economics Department, Reporter Si Yoon Yoon)

※This content is from the video news covered in the Yonhap News TV Investigation File corner.

syyoon@yna.co.kr

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Si Yoon Yoon syyoon@yna.co.kr