Good morning investors. The last Fed meeting of the year simultaneously met expectations yet also tanked markets.

Today’s edition unpacks what to know to sound smarter at the water cooler.

Inflation ain’t going away

The Fed gave markets what they expected but not in the tone they wanted. 

The Federal Reserve delivered a quarter-point rate cut on Wednesday, in line with expectations. However, Jerome Powell’s cautionary remarks sent stocks to their worst one-day loss since August 5.

In an updated outlook, the central bank signaled that it anticipates lowering interest rates just twice in 2025, down from the four it had forecast in September.

Inflation, in policymakers' view, won’t fall to their 2% target until 2027. 

In a note Wednesday evening, Bank of America dubbed it “as hawkish a rate cut as one could imagine.” 

In other words, officials see inflation — and so, rates — staying higher for longer. 

“Today was a closer call, but we decided it was the right call,” Powell said during the press conference. “From here it’s a new phase, and we’re going to be cautious about further cuts.”

The Dow Jones Industrial Average fell for its 10th session in a row, marking its worst losing streak since 1974.

At the same time, all 11 of the S&P 500’s major sectors declined.

“[The] sell off has pretty much wiped out all of the post-election gains across the board,” said Michael Reinking, senior market strategist at the New York Stock Exchange.

Eleven of 12 central bankers voted in favor of the quarter-point cut, which brought the federal funds rate into the 4.25% and 4.5% range. 

“The market is going to have to come to grips with a potentially less accommodative Fed,” said Eric Merlis, co-head of global markets at Citizens Bank.

Meanwhile, the number of FOMC participants who reported seeing upside risks to inflation rose from three to 15, according to data from Charles Schwab strategist Kevin Gordon.

Not only is that the highest number of concerned members since December 2022, but it’s the biggest-ever jump from one meeting to the next. 

“Members of the FOMC have resorted to the fact that the inflation beast will be a bit tougher to slay,” Gordon told me after the press conference. “In the context of relatively strong growth, that isn’t a bad thing, but it was bad enough news to tip the market over — mostly because of how frothy sentiment was heading into the decision.”

Do you think the Fed made the right decision with its rate cut and messaging? Reply directly to this email or let me know on X @philrosenn.

Elsewhere:

📊Has the era of super-low rates ended? The Fed is trying to figure out what the perfect level is for interest rates, but some officials think it’s already pretty close. The idea of a “neutral rate” will return front and center to policy conversations in 2025, and there’s a case that it’s actually higher now than it’s been in decades past. (WSJ)

💵Bond yields soared while stocks tumbled. The 10-year Treasury yield spiked 10 basis points to hit 4.49% after the policy meeting, while the two-year yield also jumped 10 basis points to 4.34%. Odds of a January rate cut dropped to 11% on Wednesday, from 17% the day prior. (Business Insider)

Traders see 54% odds that inflation returns back to 3% or higher in 2025, according to Kalshi, the biggest US prediction market:

Interview:

From stock prices and bitcoin to interest rates and housing affordability, everything in financial markets is interconnected. Anthony Pompliano and I discussed how these topics relate in a new podcast:

Rapid-fire:

Last thing:

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