There are several reasons for adopting a cautious near-term outlook for markets, and reflation risk is arguably at the top of the list. That’sThe central bank, as expected, reduced its target rate by a quarter point to a 5.25%-to-5.50% range. Market reaction, however, was negative: Treasury yields shot up and stock prices fell sharply.There are several reasons why market sentiment should turn cautious. The Fed’s preference to downplay reflation risk is just the opening bid.
Meanwhile, investors are starting to recognize that while the US economy is humming along as 2024 winds down, moderate growth may be at risk, depending on how the president-elect’s plans for a policy shake-up unfold in the new year. There are arguments on both sides of the debate, but there’s also more reason to wonder what’s coming in 2025. “It is a very uncertain outlook, and most of that uncertainty comes from potential changes in policy,” says Michael Gapen, chief US economist for Morgan Stanley.
Not surprisingly, Fed funds futures are now estimating a 90%-plus probability that the Fed will leave rates unchanged at the next FOMC meeting on Jan. 29.
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