What the Federal Reserve’s December Rate Cut Means for Investors in 2025

As we close out 2024, the Federal Reserve (Fed) has taken another significant step, cutting interest rates by 25 basis points during its meeting on December 18. This marks a total of 1% in rate cuts over the course of the year. While this might typically be viewed as a positive development, the Fed also signaled it will likely only cut interest rates twice next year, down from the four reductions that had been expected following their last forecast in September. This revision caused a sharp decline in the DJIA of 1123 points, as well as a decline in bond prices with a corresponding rise in yields on December 18^th.

The Fed’s rationale is rooted in a complex mix of economic data and geopolitical uncertainty. Inflation remains a key concern, with core Personal Consumption Expenditures (PCE)—the Fed’s preferred measure of inflation—recently rising to 3% from 1.8% in August. Proposed economic policies of the incoming Trump administration may also play a role. President Trump’s pro-growth agenda, including potential tariffs and corporate-friendly measures, carries both opportunities and risks. While lower corporate taxes and deregulation may stimulate business investment and economic growth, these policies could also drive inflation higher. Tariffs, in particular, have the potential to escalate costs for consumers and exacerbate tensions with major trade partners such as China, Canada and the European Union. Given this backdrop, it appears the Fed is pausing and adopting a wait-and-see approach.

Still, there are reasons for optimism as we head into 2025. U.S. CEOs are overwhelmingly bullish about the economy, with 77% expressing confidence in the next six months, a significant increase from just 45% a year ago. Additionally, the U.S. continues to outperform other global economies, with strong corporate earnings and a resilient consumer sector.

Contrary to historical patterns following rate cuts, the bond market has not seen the usual rise in values. Instead, bond prices have declined as yields have climbed sharply, with the 10-year Treasury yield increasing from 3.6% in September to approximately 4.5% in December. This rise in yields, although offering higher income opportunities for investors, also signals increased market volatility and shifting expectations about future interest rates.

Amid these uncertainties, infrastructure investment has emerged as a compelling theme for the coming years. Increased demand for energy, driven by advancements in artificial intelligence and technology, the energy transition to renewables, as well as the aging state of U.S. roads and bridges, underscores the need for significant infrastructure development. This bipartisan issue presents a rare area of agreement in an otherwise divided political landscape, offering potential opportunities for investors looking to position their portfolios strategically.

As we prepare for 2025, the importance of maintaining diversified portfolios cannot be overstated. While 2024 delivered strong returns for many, the combination of high valuations, geopolitical risks and inflationary pressures requires a balanced and cautious approach moving forward.

If you have questions about how recent developments may impact your portfolio or would like to discuss strategies for the new year, we are here to help. We wish you a joyful holiday season and a happy, healthy New Year ahead.