On Wednesday, the Federal Reserve held its policy meeting, cutting interest rates by 25 basis points as expected. Being a quarterly meeting, the Fed also released its projections for future economic growth, inflation, and policy rates. Notably, Fed Chair Jerome Powell stated that the economic forecast for December does not yet factor in the policy uncertainties represented by former President Trump. In other words, Trump’s potential policy impacts were not included in this forecast.
However, as Powell greeted the press with “Good Afternoon,” the Nasdaq tumbled by 3.5%, erasing six days of prior gains. This moment was dubbed the “most expensive ‘Good Afternoon’ in history,” given the Nasdaq’s market capitalization.
During Powell’s tenure, he has consistently avoided making forward-looking statements, emphasizing that the Fed adjusts its policies based on evolving economic conditions. Yet this time, the communication with markets appears to have caused significant turmoil. For traders, reacting to data after its release is too late; trading is inherently about anticipating outcomes. The key question is whether this turbulence reflects an emergency liquidity event or a fundamental shift in growth expectations—in other words, is the market reversing to pick up passengers?
Before the Fed meeting, there was a notable divergence between the Dow Jones Industrial Average and the Nasdaq. The Dow experienced a nine-day losing streak, while the Nasdaq continued to rally. Meanwhile, global capital markets stagnated, commodity prices remained stable, and Asian markets were notably weak. The Nasdaq’s leadership in global markets could be seen as pricing in U.S. technological advancements and the capital expenditure cycle in the tech sector.
In previous reports, we advised caution amid rising U.S. inflation and suggested preparing for global market turbulence. However, the Nasdaq’s rally exceeded expectations. Some media outlets speculated that the Fed viewed the Nasdaq’s persistent rise as a financial stability risk. From this perspective, the Nasdaq’s pullback can be seen as a result of the Fed’s messaging.
The Fed’s quarterly projections conveyed several points. First, compared to September, the forecast for 2025 reduced the expected number of rate cuts from four to two, with the terminal policy rate at the end of 2025 revised up to 3.9%. This represents a 100-basis-point upward adjustment to rate expectations. Notably, projections for core inflation, unemployment, and economic growth remained largely unchanged, underscoring the sharp downgrade in rate-cut expectations. This shift resembles a warning to markets.
Powell also highlighted the Fed’s intent to continue selling securities, reinforcing its hawkish stance.
The Nasdaq’s recent rally was not primarily driven by Nvidia and other chipmakers but rather by Tesla and Apple, the two largest contributors. While this could reflect optimism around AI, it also incorporates factors related to Trump. As Trump’s return to power draws closer, U.S. equity markets have outpaced the bond market in optimism, effectively pricing in Trump’s policy agenda.
Markets seem to simultaneously welcome Trump’s policies and fear the return of inflation. Under the Fed’s heavy-handed approach, inflation-driven trading logic is gaining traction. Rising U.S. Treasury yields are exerting downward pressure on equities, compounded by the Fed’s hawkish tone.
We expect global capital markets to face liquidity constraints and heightened volatility in the near term. Investors looking to buy during this period must have the patience to endure unrealized losses from market fluctuations.
While Trump’s policies may stimulate economic growth, the critical issue lies in their impact on global inflation. Trump’s promise to significantly lower energy prices remains unfulfilled. Housing inflation, the most stubborn component of U.S. inflation, shows no signs of easing given the current economic resilience. Limited new home supply, a shortage of second-hand homes, and surging mortgage rates are constraining real estate supply.
The Fed has acknowledged core inflation pressures, and any potential relief could come from Trump’s aggressive immigration policies, which might boost effective housing supply. This could become a key policy expectation for markets.
The current U.S. stock market correction may persist until there is improvement in U.S. CPI data. In 2025, CPI fluctuations may narrow to around 0.1%. Trump’s economic policies will continue to influence inflation, and during the upcoming market volatility, buying on dips and increasing allocations to money market funds may be prudent. Investors should wait for Trump’s energy and immigration policies to fully materialize and bring about substantial improvements in U.S. inflation.