Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business, said the stock selloff on Wall Street was “healthy” because the Federal Reserve’s cautious forecast of future interest rate cuts provided investors with a “reality check.”
The Federal Reserve cut interest rates by 25 percentage points at its last meeting of the year, lowering the overnight borrowing rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee said it may only cut interest rates two more times in 2025, down from the four cuts it forecast in September.
All three major Wall Street indexes fell on the revision of the Fed’s outlook, as investors have been betting that the central bank will remain more aggressive in reducing borrowing costs.
“The market is almost out of control… It’s making them realize that we’re not going to get rates as low as investors were betting on when the Fed started its easing cycle,” Siegel told CNBC.
“The market is overly optimistic … so I’m not surprised by the sell-off,” Siegel said, adding that he expects the Fed to cut interest rates less often next year to just one or two.
He said that with the Federal Open Market Committee raising its forecast for future inflation, “it is also possible that there will be no rate cut” next year.
The Fed’s new forecast shows officials expect the personal consumption expenditures price index, which excludes food and energy costs, to It will remain at a high of 2.5% by 2025still significantly higher than the central bank’s 2% target.
Siegel said some FOMC officials may have considered the inflationary impact of potential tariffs. President-elect Donald Trump has vowed to impose additional tariffs on China, Canada and Mexico on his first day in office.
But Siegel said actual tariffs may be “not as high as the market fears” given that Trump is likely to avoid any headwinds in the stock market.
Market participants currently expect the Fed to No rate cut before June meetingAccording to CME’s FedWatch tool, the probability of a 25 basis point rate cut was 43.7% at that time.
Barclays chief U.S. economist Marc Giannini maintained the bank’s baseline forecast that the Fed will cut interest rates only twice next year by 25 basis points in March and June, while fully taking into account the impact of higher tariffs.
Giannoni said he expects the Federal Open Market Committee (FOMC) to resume gradual rate cuts around mid-2026, once inflationary pressures from tariff exemptions dissipate.
Data released earlier this week showed that U.S. inflation accelerated in November, with the consumer price index showing a 12-month inflation rate of 2.7%, up 0.3% for the month. Excluding volatile food and energy prices, the core consumer price index rose 3.3% in November from the same period last year.
“Given how high short-term interest rates are relative to inflation, it’s surprising to everyone, including the Fed, that the economy can remain as strong as it is,” Siegel added.
Jack McIntyre, portfolio manager at Brandywine Global, said the Fed has entered a new phase of monetary policy – the pause phase, adding, “The longer this goes on, the more likely it is that the market will equate rate hikes with rate cuts.” “Pricing”.
“Policy uncertainty will lead to greater financial market volatility in 2025,” he added.
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