The Fed cuts rates by 25bp as expected and the statement was unchanged but there was a dissent from the cut and the SEP projected only 2 rate cuts in 2025 down from 4. Importantly, the Fed increased its forecast for core PCE to 2.5% for 2025 up from 2.1% at the last projection. Importantly, Fed Fund futures indicated 1.5 cuts after the release down from two cuts prior. Stock and bonds declined in response to the hawkish cut. Chair Powell’s statement was in line with the release but did mention that the housing market was weakening. He also indicated that the labor market had cooled, and that shelter inflation has moderated.
We continue to forecast that Core PCE inflation will decline below 2.4% by the end of the first quarter of 2025 as the shelter component continues to reflect the reality of declining rents and auto services inflation normalizes. We forecast that this data will allow the Fed to cut four times next year and that the 10-year rate will fall to the 3.75% due to global rate cuts and due to the $56 trillion of global pension funds rebalancing. We also believe that the current 10-year rate of 4.5% is not sustainable as the housing market is likely to roll over at that level, since it implies a 30-year mortgage rate over 7%. We reiterate our 7,000 target on the S&P based on the assumption of a corporate tax cut to 18%. We also reiterate our 2024 target on the S&P of 6,000 and expect the stock market to be range bound through year-end but expect the market to rally during earnings season in January.
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