Slower Rate Cuts and New Tariffs: Will 2025 Trigger Market Corrections?

As of December 1st, 2024, the U.S. economy is a mixed bag for investors, with moderate growth, persistent inflationary pressures, and evolving monetary policy. Understanding these dynamics is crucial for making informed investment decisions.

Economic Growth Indicators

The GDPNow model from the Federal Reserve Bank of Atlanta projects a 2.6% annualized growth rate for the fourth quarter of 2024 in the U.S. real Gross Domestic Product. This number indicates a stable economic expansion, but at a moderate pace.

Inflation Trends

Inflation continues to be at the forefront, with the PCE price index, its preferred measure, up to 2.8% year-over-year in October, from 2.7% in September. That uptick indicates that the inflationary pressures are lingering and are thus challenging monetary policy.

Federal Reserve's Monetary Policy

Against these economic indicators, the Federal Reserve has cut the interest rates twice in 2024, once most recently in November by 25 basis points to a federal funds target range of 4.5%-4.75%. Minutes from the November Federal Open Market Committee (FOMC) show a more cautious tone, considering economic uncertainty and complexity in estimating the neutral rate of interest.

Market Expectations and Projections

Analysis of 30-Day Fed Funds futures prices in the CME FedWatch Tool suggests a 70 percent chance of a 25 bp rate cut in the December 17-18, 2024, meeting of the FOMC. However, stronger than expected economic data, particularly from the labor market, have the potential to change this scenario.

Projecting Federal Funds Target Rate Over the Next 12 Months

Considering current economic conditions and market expectations, the target federal funds rate may follow the below pattern:

Month/Year Projected Target Rate (%)

Dec 2024         4.25–4.50

Mar 2025         4.00–4.25

Jun 2025           3.75–4.00

Sep 2025           3.50–3.75

Dec 2025          3.25–3.50

Implications for Investors

Slower rate cuts in 2025, as suggested by market analysts, could significantly influence market trends in the first half of the year. This impact may be heightened by Trump introducing aggressive tariffs to pressure trade partners into negotiations. Such developments could lead to two or more 10% market corrections as we move through the Q1 earnings season.






Location: Dubai - United Arab Emirates

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