As the Christmas holidays approach, market narratives begin to diverge: due to the Fed's "hawkish" stance, investors excited by Trump's policies now have to consider a more specific risk in the outlook, namely that the anti-inflation task is still unfinished.

Amid the "pulling in two directions" of the Trump policy outlook and inflation outlook, this week multiple asset classes, including US stocks, experienced a "roller coaster" of significant ups and downs.

On Wednesday, the Fed indicated that next year's inflation rate would still be higher than expected, reducing the 2025 interest rate cut forecast from 4 times to 2 times; concerns about the inflation outlook led to a sharp decline in US stocks, triggering a global market shock; however, the PCE inflation released yesterday for November was entirely below expectations, which somewhat restored market sentiment and stimulated a strong rebound in the S&P.

Meanwhile, the "Trump trade" driven by Trump's election as president of the USA is cooling down, with Bitcoin, the most representative asset of this trade, having fallen from the threshold of $0.1 million.

Max Gokhman, Senior Vice President of Franklin Templeton Investment Solutions, commented on this by saying:

"Many people, even those who expected the Fed meeting to adopt a tough stance, are surprised."

"Some believe we will unleash animal spirits (i.e., psychological expectations) based on the new president's agenda, while others think there will be severe inflation, which is actually a tug-of-war that will depress stock prices."

The Federal Reserve is expected to regain market dominance.

Various signs indicate that the Federal Reserve seems more likely to reclaim market dominance.

After the Federal Reserve announced its interest rate decision, U.S. stocks nearly erased all gains since Election Day. Since November 5, the Dow Jones has accumulated an increase of nearly 2,800 points, but as of Wednesday's close, this cumulative gain shrank to 100 points.

Some perspectives suggest that the market's strong reaction indicates that the Federal Reserve is the 'big boss', ultimately leading to a market impact greater than the expected policies of Trump.

Art Hogan, Managing Director and Chief Market Strategist at B. Riley Investments, stated that the Federal Reserve's predictions regarding interest rates and inflation are like 'a heavy punch to the market':

"This scares everyone."

Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, believes that some of the excitement surrounding the optimistic expectations of Trump's policies is 'gradually diminishing', and part of the market focus is shifting towards the growth risks brought by potential tariff policies.

The bond market seems to have predicted this early on; in the weeks leading up to Trump's election, the yield on the 10-year U.S. Treasury bond has continued to trend upward.

Editor/lambor