Fed-spectations: The Future of Rate Cuts

The Weekly Recap

Good morning and happy Friday! The Fed cut rates another 25 bps, November saw the largest annual gain in home sales volume since 2021, while home sales are also transacting at their fastest pace since March. Bitcoin keeps climbing, commercial real estate is seeing a comeback especially for newer buildings. GDP was revised up for Q3 to 3.1% and either hobbyists, terrorists, aliens or the US government continue to fly Drones over parts of NY and NJ.

If you missed last weeks newsletter on What is the Future of SALT Cap Deductions for Homeowners , you can read that through the link.

Fed-spectations: The Future of Rates Moving into 2025

The Federal Reserve expectedly cut rates this week following their December meeting. While the 25bps cut was anticipated by markets, the outlook for cuts moving into next year as well as Fed Chairman Powell’s hawkish remarks caused, markets to have a negative reaction. With rates being cut a full 100 bps since September, inflation is proving to be stickier than hoped.

With a strong economy as the backdrop for this meeting, Powell admitted that cutting rates this time around “was a closer call than previous reductions” meaning that there were several dissenting voices for even having a rate cut. Treasury bonds increased after the rate cut which lead to the slight uptick we saw this week in mortgage rates. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the range of the Fed’s rate.

Looking at the Federal Reserve’s infamous dot plot, 14 of the 19 members of the Fed see two rate reductions in 2025 while only 5 members see more than two. Focusing even further into the future assuming all data remains the same (which it wont) the Fed is also anticipating two cuts in 2026 and one into 2027 with the Fed funds rate stabilizing at 3%.

The adverse reaction to the news of fewer rate cuts in 2025 is rooted in the Federal Reserve’s earlier projection during its September meeting, where it signaled the possibility of four 25bps rate cuts that year. This sudden shift in expectations has put investors on its toes, as it not only signals a potential recalibration in the Fed's economic outlook but also casts uncertainty over broader market dynamics.

From a market standpoint, adjustments to monetary policy projections are not unusual. However, they can dramatically reshape sentiment, as investors rely heavily on these forecasts to guide their strategies. At the beginning of this year, investors were pricing in as many as SIX rate cuts which spurred a lot of activity. A reduction in the anticipated rate cuts could signal a more prolonged period of tighter monetary conditions, potentially weighing on economic growth, corporate profitability, and borrowing costs.

For investors, the shift is not merely a numbers game; it reflects an evolving economic narrative that may require recalibrating expectations for growth, inflation, and the broader trajectory of financial markets.

—This portion of the newsletter will take a little hiatus until the beginning of the year but you can still expect to have news and market updates in your inbox every Friday morning at 10am!—

Market Performance

Here are how some other indexes and asset classes have performed as of this morning’s opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past WEEK as well as newly signed contracts in Manhattan.

Mortgage Rate Update

Mortgage rates crept up slightly this week as it continues to wobble back and forth within the 6%-7% ranges. With an increase in home sales, with November seeing one of the largest annual gains in years, homebuyers are beginning to digest higher rates as a long term part of the equation. With this, buyers are gradually willing to move forward with buying a home which has led to the increase in purchase activity.

News You Can Use

• Fed Cuts By a Quarter Point, Indicates Fewer Reductions Ahead CNBC

• US Q3 Growth Revised Up to 3.1% Bloomberg

• November Home Sales Post Biggest Annual Gain Since 2021 Wall Street Journal

• Powell Signal's Fed’s Focus Has Returned Firmly to Inflation Bloomberg

• The ‘Vibecession’ Is Over as Optimism Gains Steam CNBC

• JP Morgan Sees Chance for Treasury Market Calm in 2025 Yahoo Finance

• US Retail Sales Strengthen on Jump in Motor Vehicle Purchases Bloomberg

• Fed Cuts Reverse Repo Rate By Wider Margin than Funds Rate Target Reuters

• US Economic Output Grows at Fastest Pace in Nearly 3 Years to End 2024 Yahoo Finance

• Home Sales Rise at Fastest Pace Since March NY Post

• Donald Trump’s Election Win Sparks Trading Surge for Banks and Brokers Financial Times

• Bitcoin Rises to New Record Above $107,000 CNBC

• Where Money Doesn’t Buy Happiness Axios

• NYC’s Top Office Spark a Wall Street Frenzy as Others Sit Empty Bloomberg

• Powell says Fed Cannot Hold Bitcoin, Not Seeking to Change That Reuters

• The Commercial-Property Market is Coming Back to Life Bloomberg

• FAA Temporarily Bans Drones in Part of NY and NJ After Weeks of Panic Gothamist

The Deep Insight

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