The Prediction the Markets Got Totally Wrong in 2024
December 30, 2024
As I approach the end of the year, I use it as a time for reflection and assessment. It allows me to check in with myself to see what I accomplished and what goals or New Years’ resolutions I want to set for 2025. Investors, analysts, economists, etc. are going through a similar exercise. What predictions were right, wrong, and what do we see for the new year? The number one thing markets got wrong in 2024? The Federal Reserve’s (Fed’s) interest rate trajectory.
The continual change in the Fed’s rate path
Coming into 2024, the big theme was ‘the Fed pivot’ to interest rate cuts. The bond market priced in over an 80% probability the Fed would start its rate cutting cycle at its March policy meeting, with six 0.25%, or 25 basis points, cuts expected in the federal funds rate in the calendar year. By the end of March, expectations shifted to a June start date, with a total of three 0.25% cuts priced into the bond market. By mid-year, this moved to September with two 0.25% cuts in 2024. In September, we finally got the first rate cut from the Fed. To start the easing cycle, the Fed cut rates by 0.5% at that policy meeting. Up until the Friday before, markets expected just a 0.25% reduction. By the end of the third quarter, the futures markets predicted three additional 0.25% cuts by year end. Even with a more transparent Fed communication process, it was tough for markets to keep up with the changing economic and inflation dynamics faced by the Fed. Clearly the Fed was (and is) challenged as well.
As Dustin mentioned in last week’s commentary, the Federal Reserve cut interest rates 0.25% at its final policy meeting of 2024. With this, the Fed lowered rates a total of 1% in the calendar year. In addition, policy members touched the brakes going forward. The forecast number of 2025 rate cuts are now half of those shown in their September outlook. Quite the change from expectation of a year ago.
Why did the bond market get the Fed’s trajectory wrong?
First, the U.S. economy proved resilient. If you remember my commentary a year ago, the consensus view saw slowing growth with a rising recession risk in 2024. That proved wrong. Economic growth surprised to the upside in the second half of 2024 and is forecast to record above trend growth for the second consecutive calendar year. Second, the road to the Fed’s 2% inflation target proved stickier and bumpier than anticipated. Inflation readings moved sideways in the second half of the year. This caused the Federal Reserve to increase its inflation projections for this year and next. Both contributed to the continually changing landscape for the Fed’s monetary policy.
An evolving Fed outlook = interest rate volatility
Constant change in the interest rate outlook creates volatility in the bond market. We expect this to continue into 2025, as the Fed’s forward path remains uncertain due to stubborn inflation and the fiscal and economic impacts of the new Administration. Still, even with rate volatility, high quality intermediate-term bonds remain attractive and will be an area of focus for us within fixed income in 2025.
As we end this year, we want to thank you for your continued business and confidence in us in helping to achieve your long term goals. We hope you have a Happy New Year and look forward to working for you in 2025. Please reach out to your Wealth Management Advisor if you have any questions or would like to schedule your year-end review. Your success matters to us.