Dominating the Market "Narrative": Powell vs. Trump

As the Christmas holiday approaches, market narratives begin to diverge: due to the Federal Reserve's "hawkish" stance, investors excited by Trump's policies now have to consider a more specific risk in the outlook, namely that the anti-inflation mission is still incomplete. Against the backdrop of the "pull between Trump's policy outlook and inflation outlook," multiple asset classes, including U.S. stocks, experienced a "roller coaster" of sharp rises and falls this week. On Wednesday, the Federal Reserve indicated that next year's inflation rate would remain above expectations, lowering its rate cut expectations for 2025 from four times to two. Concerns about the inflation outlook led to a sharp decline in U.S. stocks, triggering a massive shock in global markets; however, the November PCE inflation data released yesterday came in below expectations, restoring some market sentiment and stimulating a strong rebound in the S&P 500. Meanwhile, the "Trump trade," driven by Trump's election as U.S. president, is cooling off, with Bitcoin, the most representative asset of this trade, having fallen from the $100,000 mark. Max Gokhman, Senior Vice President at Franklin Templeton Investment Solutions, commented: “Many people, even those who expected the Federal Reserve to take a tough stance, were surprised.” “Some believe we will unleash animal spirits (i.e., psychological expectations) based on the new president's agenda, while others think there will be severe inflation, which is actually a pull that will depress stock prices.” The Federal Reserve is Expected to Regain Market Dominance Various signs indicate that the Federal Reserve seems more likely to regain market dominance. After the Federal Reserve announced its interest rate decision, U.S. stocks nearly erased all gains since election day. Since November 5, the Dow Jones Industrial Average has risen nearly 2,800 points, but by the close on Wednesday, this cumulative gain had shrunk to just 100 points. Some believe that the market's strong reaction indicates that the Federal Reserve is the "boss," and the market impact it brings is ultimately greater than the expected policies of Trump. Art Hogan, Managing Director and Chief Market Strategist at B. Riley Investments, stated that the Federal Reserve's predictions regarding interest rates and inflation are like "a heavy punch to the market": “This has scared everyone.” Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, believes that some of the excitement surrounding optimistic expectations of Trump's policies is "gradually fading," and part of the market focus is shifting to the growth risks posed by potential tariff policies. The bond market seems to have predicted this early on, as the yield on 10-year U.S. Treasury bonds has been on an upward trend since a few weeks before Trump's election