The Federal Open Market Committee (FOMC) gave the markets exactly what was expected this week – a hawkish pause of a 25 basis point cut. In plain English, that translates to a rate cut now with hints of slower and fewer cuts to come. The reaction to the third rate cut in three months was anything but expected. Stocks collapsed, posting the worst single day move in months, and Treasury yields surged as much as 14 basis points. The exaggerated moves were triggered by the Federal Reserve’s projection for significantly fewer rate cuts over the next two years due to stalling inflation and uncertainty surrounding the new administration. The committee has grown concerned that inflation, while it has eased from peak levels, remains elevated and warrants a more cautious approach from here.

More than listening to Chairman Powell ‘s words, I like to pay attention to his demeanor during the press conference. Powell appeared to come in with guns blazing, ready to take on questions about why the Fed would cut right at a time when inflation seems to be rising and the economy is, in his words, “remarkable.” Powell was very direct with his answers when asked why they made a move now. The chair said there was a lot of conversation about it, but everyone decided that this was the right time to do one last cut for the year. The Fed has cut rates 100 basis points in 2024, bringing the funds rate to the year-end goal of 4.40%. The Fed believes it is now in a position to be more cautious about adjusting interest rates and has room to handle whatever comes next. That may be cutting rates if the labor market weakens or raising rates if inflation escalates. If there were any chance the Fed was not paying close attention before, the committee’s vow to be even more data dependent for future moves proves it.

Retail Sales – For the fifth month in a row, retail sales exceeded expectations. November sales rose 0.7%, almost double October’s pace. Seven of the report’s 13 categories posted increases. Auto sales, which made up a large percentage of the gain, were the strongest in over three years according to Ward’s Automotive Group. Lower interest rates and deep year-end discounts boosted auto sales. E-commerce sales jumped 1.8% as Black Friday and Cyber Monday promotions generated massive sales. Surprisingly, sales at both grocery stores and eating out were down. Overall, though, the consumer remains resilient during the crucial holiday shopping season; lured by discounts and bolstered by incomes that have been rising faster than prices.

NOTE: Behind the Numbers  will not be published next week. The report will resume on January 3, 2025. I hope you and your family have a very happy holiday week.