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Market Selloff After Fed Rate Cut

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FED,Rate Cut,Market Selloff

The stock market reacted negatively to the Fed's rate cut yesterday, with major indices experiencing significant drops. The selloff was triggered by the Fed's updated projections of only two more rate cuts next year, lower than market expectations of three. While the 10-year Treasury yield has un-inverted, indicating a potential boost to lending and the economy, rising inflation expectations and high interest rates pose challenges for the market and the budget.

Let's start with what happened to markets after the Fed's rate cut yesterday. It wasn't pretty. The Dow dropped 1,100 points. The S&P fell 3%. The Nasdaq dropped 3.5%. The Russell 2000 small-caps fell 4.4%. And the 10-year yield surged, pushing mortgage rates back above 7% today.

But there is plenty of not-so-good news about this, too. For one, no one wants stickier inflation. The 10-year"TIPS" yield, an inflation proxy, has been spiking in recent days, and especially after the Fed's rate cut yesterday. It's gone from 1.9% two weeks ago, to 2.22% this morning. It's only been higher twice in recent years; earlier this summer, and in late 2023.

Layer on top of that yesterday the arrival of what Dan Clifton of Baird calls--Elon Musk. Musk and Vivek Ramaswamy were lobbying hard on X against the 1500-page bill that would avoid a government shutdown at midnight Friday and fund the government through March. The reason? Too many non-core spending projects, like $3 billion for a new NFL stadium in D.C.

With respect to James Carville, who once joked he wanted to be reincarnated as the bond market in order to intimidate everybody, Musk seems to have even more power than the vigilantes now.

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