Last week, the Federal Reserve used the "hawkish interest rate cut" stick and took a more cautious stance on the prospect of interest rate cuts next year, which disappointed Wall Street. However, for investors, reducing the number of interest rate cuts or pressing the 'pause button' may not be the worst-case scenario.
Torsten Sloan, Chief Economist of Apollo Global Management, has warned that the Federal Reserve may have to return to the path of interest rate hikes in 2025, as the US economy remains strong and the policies planned by President elect Trump could push up inflation.
The strong economy, coupled with the possibility of (Trump) cutting taxes, raising tariffs, and restricting immigration, increases the risk that the Federal Reserve will have to raise interest rates in 2025, "Slock wrote in a report late last week. We believe that the likelihood of the Federal Reserve raising interest rates in 2025 is 40%
Last week, the US Department of Commerce raised the third quarter GDP growth rate from the previously estimated 2.8% to 3.1%, which means that the US economy grew faster than previously estimated in the third quarter.
At the same time, the forecast for the current quarter also shows no signs of economic slowdown. The Atlanta Fed's GDPNow model predicts that the US GDP growth rate in the fourth quarter will be 3.2%. Slock pointed out that the latest estimate is much higher than the long-term economic growth forecast of 2% by the Congressional Budget Office (CBO) in the United States.
At the same time, US President elect Trump proposed policies such as tax cuts, increased tariffs, and a crackdown on immigration during the campaign, which are widely believed to exacerbate inflationary pressures.
Due to the stubbornly high inflation rate in the United States remaining above the Federal Reserve's 2% target, these policies may reduce the space for further interest rate cuts by the Fed. This year, the Federal Reserve has lowered interest rates by 100 basis points to 4.25% -4.50%.
In their economic forecast for next year, Federal Reserve officials seem to have taken into account the impact of Trump's policies. They significantly raised their inflation forecast, but kept their economic growth and unemployment rate forecasts unchanged.
For investors, now it's starting to look similar to 2022- high inflation, rising interest rates, and falling stock prices, "said Slock.
In 2022, the S&P 500 index fell 19%, the Nasdaq index plummeted 33%, and the market experienced its worst year since 2008.
Some other Wall Street insiders also predict that the Federal Reserve will adopt a more hawkish policy next year. Market veteran Ed Adney stated in a report last week that the likelihood of the Federal Reserve cutting interest rates only once or even not at all next year has increased.
Nick Timiraos, a journalist from The Wall Street Journal known as the "mouthpiece" of the Federal Reserve, recently published an article stating that the era of ultra-low interest rates in the United States may have ended. If the Federal Reserve believes that the neutral interest rate has risen, it may stop cutting interest rates for a considerable period of time.