Stock selling after the Fed's rate cut is strong

The Fed's neutral rate could be between 3.5-4%: Jeremy Siegel

Stock selling on Wall Street was "strong," as the Federal Reserve's cautious projection of future rate cuts gives investors a "reality check," according to Jeremy Siegel, professor emeritus of -finance at the Wharton school of the University of Pennsylvania.

The United States Federal Reserve lowered interest rates by a a quarter of a percentage point in its last meeting of the year, while its overnight lending rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee has indicated it will probably lower rates just twice more in 2025, fewer than the four cuts indicated in its September forecast.

The three major indices on Wall Street sank in response to the Fed's revised outlook, as investors had long bet on the central bank to remain more aggressive in reducing borrowing costs.

"The market (were) almost in a runaway situation ... and that brought them to the reality that we're just not going to have low interest rates" as investors were betting on when the Fed began the cycle of ' her decline, Siegel told CNBC's "Squawk Box Asia."

"The market has been overly optimistic ... so I'm not surprised by the selloff," Siegel said, adding that he expects the Fed to reduce the number of rate cuts next year, by one cut. or just two.

There is also a "chance of no cut" next year, he said, as the FOMC raised its inflation forecast going forward.

Fed Chair Powell: I'm confident we'll get inflation back to 2%

The new Fed projections show that officials expect the price index of personal consumption expenditures, excluding food and energy costs, or core PCE, remain elevated to 2.5% until 2025still significantly higher than the central bank's 2% target.

Siegel suggested that some FOMC officials may have factored in inflationary impacts from potential tariffs. President-elect Donald Trump promised that implement additional tariffs on ChinaCanada and Mexico on the first day of his presidency.

But the actual tariffs may not be "anywhere as big as the market fears," Siegel said, as Trump likely seeks to avoid any pushback from the stock market.

Market participants now expect the Fed does not reduce rates until its June collectionpricing in a 43.7% chance of a 25 basis point cut at that time, according to CME's FedWatch tool.

Marc Giannoni, the chief US economist at Barclays, maintained the bank's baseline projection of just two rate cuts of 25 basis points by the Fed next year, in March and June, while fully incorporating the effects of the tariff increases.

Giannoni said he expects the FOMC to resume incremental rate cuts around mid-2026, after the inflationary pressures of tariffs fade.

Data released earlier this week showed Inflation in the United States increased at a faster annual pace in November, with the consumer price index showing a 12-month inflation rate of 2.7% after rising 0.3% in the month. Excluding volatile food and energy prices, the main consumer price index rose 3.3% on a year-on-year basis in November.

"It's a realization and a surprise to everyone, including the Fed, that given how high short-term rates have been relative to inflation, that the economy can stay as strong as it is," Siegel added.

The Fed has entered a new phase of monetary policy — the pause phase, said Jack McIntyre, portfolio manager at Brandywine Global, adding that "the longer it persists, the more likely the markets will they would have to equally price a rate increase versus a rate decrease. ."

"Policy uncertainty will lead to more volatile financial markets in 2025," he added.


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