Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, stated that the stock sell-off on Wall Street is "healthy," and the Federal Reserve's cautious forecast on future interest rate cuts provides investors with a "reality check."

In its final meeting of the year, the Federal Reserve lowered interest rates by 25 basis points, bringing the target range for overnight borrowing rates down to 4.25% to 4.5%. Meanwhile,the Federal Open Market Committeeit was stated that there might only be two more rate cuts in 2025, less than the four rate cuts predicted in September.

As investors have been betting on the Federal Reserve to reduce borrowing costs more aggressively, all three major stock indices on Wall Street reacted negatively to the Fed's revised outlook.

Siegel stated in an interview, "The market was almost out of control (previously)... This made them realize that we won’t achieve such low interest rates as investors had bet on when the Fed started the easing cycle."

Siegel said, "The market is too optimistic... So I am not surprised by this sell-off," and added that he expects the Federal Reserve to reduce the number of rate cuts next year, possibly only one to two cuts.

He also stated that the Federal Reserve may not cut interest rates next year because the Federal Open Market Committee has raised future inflation expectations.

The Federal Reserve's new forecast shows that officials expect the core PCE price Index, excluding food and Energy costs, to remain at a high of 2.5% in 2025, still significantly above the Federal Reserve's 2% target.

Sigal hinted that some Federal Open Market Committee officials may have already considered the inflation impact from potential tariffs. President-elect Trump vowed to impose additional tariffs on China, Canada, and Mexico on his first day in office.

However, Sigal stated that considering Trump may avoid any rebound from the stock market, actual tariffs may not be as large as the market is worried about.

The CME's Federal Reserve Watch tool shows that market participants now expect the Federal Reserve to cut interest rates only at the June meeting next year, with a 43.7% probability of a 25 basis point cut at that time.

Marc Giannoni, Barclays' Chief Economist in the USA, maintained the bank's baseline forecast that the Federal Reserve would cut rates by 25 basis points in March and June next year while fully considering the impact of rising tariffs.

Giannoni stated that he expects the Federal Open Market Committee to resume gradual rate cuts around mid-2026 after inflationary pressures caused by tariffs subside.

Data released earlier this week showed that US inflation in November rose at a faster pace, with CPI data showing that the November CPI increased by 2.7% year-on-year and 0.3% month-on-month. Excluding the more volatile food and Energy prices, the core CPI increased by 3.3% year-on-year in November.

Sigal added, "This is something that surprised everyone, including the Federal Reserve; short-term interest rates are already high relative to inflation, yet the economy remains strong."

Jack McIntyre, portfolio manager at Brandywine Global, stated that the Federal Reserve has entered a new phase of monetary policy — the pause phase. "The longer the pause lasts, the more likely the market will perceive that the Federal Reserve's next move for rate hikes and cuts is equally probable."

He added, "Policy uncertainty will lead to increased financial market volatility in 2025."

Editor/rice