The Federal Reserve concluded 2024 with its third rate cut of the year, reducing the benchmark interest rate to 4.4%. However, November’s inflation data reveals lingering challenges for policymakers. The Consumer Price Index (CPI) increased 0.3% month-over-month and 2.7% year-over-year, marking consecutive inflation accelerations driven by elevated shelter and food costs. Similarly, the Producer Price Index (PPI) rose 0.4% monthly and 3% annually, its highest growth in nearly two years, highlighting pressures from rising wholesale prices.

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While the Fed projects inflation to moderate to 2.5% by the end of 2025, this remains above its 2% target, complicating the pace of further rate cuts. Policymakers reduced their forecast to only two rate reductions in 2025. Chair Powell stressed a cautious approach, citing uneven disinflationary progress and potential inflationary risks from incoming Trump administration policies, which could stimulate growth but reignite price pressures.

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Markets knee-jerked sharply to the Fed’s reduced projections.

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The S&P 500 dropped 3%, and Treasury yields surged, reflecting investor concerns over persistently high inflation and slower monetary easing. On Friday, the selloff was saved by another inflation report that was better than expected. The core PCE - the Fed's preferred inflationary measure - came in at 2.4% year over year growth. Markets rebounded up Friday, and what's interesting is: had the Fed meeting taken place after the PCE report arrived, it's possible Powell would have made softer statements on the need to be cautious amidst rising inflation. If that happened, the selloff would have been less pronounced.

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The difference in reports is causing some market analysts to speculate that the selloff has created a new buying opportunity. Our take is that the pullback is a short term opportunity but the S&P 500 is extremely expensive relative to historical norms. Stock picking with a mind on valuations is essential.

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