Weekly Market Update: January 27, 2025

The Federal Reserve may not cut the benchmark short-term interest rate again before midyear. That is because the rate of inflation, as reflected by the pace of December consumer and producer price increases, was still running above the Fed’s target growth rate of 2.0%. This, along with a still-healthy labor market, now has the Fed projecting a shallower rate-cut path this year. After we went to press, the central bank was scheduled to hold its first monetary policy meeting of 2025, with all indications pointing to the federal funds rate remaining at 4.25% to 4.50%. 

Pausing on the interest-rate front would also give the Fed more time to assess the impact of the new Administration in Washington, D.C. on the performance of the U.S. economy. President Trump has promised an economic agenda focused on lower taxes, fewer regulations, and the increased use of international tariffs, the latter of which could lead to a re-acceleration in inflation. That said, the likely resultant increase in energy production later this year may well decrease inflation by lowering energy prices, which are a significant factor in production costs across a variety of industries. 

Treasury yields remain on an upward trajectory. In fact, the yield on the 10-year Treasury note recently was a full percentage point above where it was on September 17th, the last day before the central bank began cutting interest rates. This move higher has been driven by a number of factors, including increased confidence in the economic outlook, heightened worries about the fiscal policy outlook, further reassessment of the Federal Reserve’s likely rate-cut path, and raised concerns about the direction of inflation.

With fixed-income yields likely to remain elevated in 2025, profit growth from Corporate America will be needed to justify the equity market’s frothy valuation. On point, fourth-quarter reporting season got off to a favorable start with many of the prominent financial services companies and money-center banks easily surpassing expectations.

Conclusion: With some building questions about the Fed’s near-term monetary policy course and the likely changing fiscal policy landscape, some equity market volatility can’t be ruled out. In this environment, we favor a portfolio led by the stocks of high-quality companies. 

Source: ValueLine.com