The Fed cut as expected and paint a pretty picture for the year ahead.

It was a weird outcome at the Fed meeting: as expected, the Fed cut interest rates by 25 basis points whilst delivering what was generally considered a fairly optimistic economic outlook for the year ahead. There were three dissenters: one wanted a greater cut, obviously had his eye on the top when it becomes available in May, and two for no change; those two risking being sent to the naughty step by the President. As the Fed announced the news, it also bolstered its outlook for economic growth in the year ahead, now expecting the economy to grow at 2.3% next year, up from 1.8% previously. They also brought down their inflation forecast, now expecting PCE inflation to come in lower at the end of 2025 and to decline further in 2026. The Fed also kept its expectations for unemployment anchored. It sees unemployment peaking at 4.5% this year, before declining to 4.4% next year.

No wonder stocks rallied hard in early trading on Thursday after a dodgy start to the day caused by Oracle’s earnings report. Oracle shares fell 15% at one point after it stoked further anxiety about the artificial-intelligence trade. Oracle announced it had spent a record $12 billion in capital expenditures during its latest quarter, far more than the $8.4 billion Wall Street was expecting. The Fed’s meeting and subsequent economic outlook should provide a positive backdrop into year-end, and portfolio managers look to hold onto the gains they have made this year.

The sectors that performed well yesterday were generally all those that respond well to a positive economic outlook, including financials, materials and Industrials. The Nasdaq declined on the day in response to Oracle’s results, indicating that the broadening of what drives the markets higher is possible, and the benefits of a diversified portfolio.

Next week it’s the Bank of England’s turn on December 18th. Although they may not be as optimistic about the economic outlook as the Fed is about their domestic economy, the likelihood is that they will cut rates in the expectation that inflation will continue to drift lower, as they look to support economic activity. Today, the latest GDP report came out and probably reinforced the likelihood of a rate cut. Markets had expected a slight bounce in economic activity in the past month. Today’s report that GDP shrank month over month and the three-month average came in weaker than expected, also indicating a contraction, which will make more negative headlines. GDP year over year came in unchanged at 1.1%, again below consensus.