Economic pain worldwide will trigger capital flight to U.S. Treasurys, driving down those yields, investment manager Louis Navellier says. The Fed will follow.
Most Fed-watchers and the FOMC itself do not yet foresee all of these global dominos falling.
U.S. Federal Reserve Chair Jerome Powell has lost any ability he may have had to keep the Federal Open Market Committee (FOMC) moving in lockstep. Now more uncertainty surrounds the Fed after last week's FOMC meeting, which spooked Wall Street.
The Fed's Dec. 18 rate cut announcement revealed disagreement within the FOMC on (1) how the U.S. economy is doing, (2) whether many more key interest rate cuts are necessary and (3) if U.S. inflation is reaccelerating.
The December FOMC Statement and "dot plot" signaled that the Fed is pivoting from focusing on unemployment back to controlling inflation. The signals point to the Fed pausing after two more rate cuts in 2025 - down from four rate cuts expected in the U.S. central bank's previous dot plot.
But the Fed in fact will need to cut more than twice next year. Four rate cuts are most likely - as collapsing interest rates in the eurozone cause U.S. Treasury yields to decline in the second half of 2025.
The global interest-rate collapse is just beginning. Specifically, the European Central Bank (ECB) will be cutting key interest rates four- or five times in 2025 until rates are at 2% to 1.75%. Most Fed-watchers and the FOMC itself do not yet foresee all of these global dominos falling, as the recession in the eurozone's largest economy, Germany, gets worse. The second-largest economy in the eurozone, France, is also slipping into a recession. Both Germany and France are mired in political crisis and are "headless" until new leadership emerges.
More economic and political chaos is occurring elsewhere in the world. As an example, Brazil has been actively striving to support its currency, the real (USDBRL), but with a 10% budget deficit, a president recovering from emergency brain surgery, and seemingly no end to government spending, Brazil seems to be copying Argentina and may soon have to devalue its currency.
So far this year, the real has fallen 21% against the U.S. dollar (DX00). When a currency is faltering, it creates hideous inflation for its citizens. So, although Brazil's President Lula da Silva may have been trying to help the country's poor, his administration's inflationary policies are actually making their lives more miserable.
As a result of the chaos in Brazil, France, and Germany, plus economic growth sputtering in China as its population continues to shrink by more than 2 million people per year, the U.S. remains the growth engine of the world.
Falling interest rates around the world will trigger capital flight into U.S. Treasurys, driving those yields down. Since the Fed never fights market rates, I am confident that the Fed will cut its key interest rates four times in 2025.
Hawks and doves
The Fed did see some dissent within its ranks last week. Cleveland Fed President Beth Hammack argued that interest rates should be held steady until there's more progress in cooling inflation. Said Hammack: "Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2% objective."
Speaking of that 2% inflation objective, it is getting closer since the Personal Consumption Expenditure (PCE) index rose just 0.1% in November and is up 2.4% in the past 12 months. The November increase was the smallest monthly rise in the PCE since last May. The core PCE, excluding food and energy, rose 0.1% in November and 2.8% in the past 12 months. When shelter costs (owner's equivalent rent) are stripped out of the PCE, inflation is essentially running at the Fed's 2% target rate.
Powell's comment that the Fed's year-end inflation forecast has "kind of fallen apart" did not inspire confidence. Even still, it's likely that the stock- and bond market negative reaction to the FOMC Statement, dot plot, and Powell's press conference were grossly overdone.
Another reason the stock market sold off after the FOMC statement was because of concern about a federal government shutdown. Of course, after all the drama and theatrics, as almost always, legislators passed a bill to keep the federal government operating through March. President-elect Donald Trump wants to get rid of the federal government deficit ceiling, so perhaps these theatrics won't be staged in the future.
Louis Navellier is founder and chief investment officer of Reno, Nev.-based Navellier & Associates, Inc., a SEC-registered family office that manages more than $1 billion.
More: Forget the stock-market tumble, the Fed made the right move in a wild week
Plus: Wall Street's 'Santa Claus rally' window is about to open with the Dow down in December
-Louis Navellier
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