As 2024 draws to a close, the Federal Reserve's monetary policy has become a central focus for markets. Following two rate cuts this year totaling 75 basis points, Wall Street is divided over the outcome of the December meeting.

In an interview with Wall Street Frontline, Peter Cardillo, Chief Economist at Spartan Capital Securities, shared his outlook on the Fed's rate cycle and its implications for markets.

Cardillo predicts a further 25-basis-point cut in December, bringing the year's total reduction to 100 basis points. However, this view is not without contention. Institutions like Nomura suggest the Fed may pause its rate-cutting cycle, citing the risks of inflation resurgence and mixed economic data.

Looking ahead, concerns over the Fed's cautious stance in 2025 are growing as inflationary pressures linger. Cardillo bases his forecast on inflation data, noting that while inflation remains persistent, it is not severe enough to halt further cuts. He also highlights that future policy will hinge on the economic and trade agenda of the incoming Trump administration, particularly regarding tariffs and fiscal adjustments.

Reflecting on 2024, Cardillo emphasized the strong performance of U.S. equities, with the S&P 500 and Nasdaq hitting record highs. Nonetheless, he cautioned that markets are nearing "perfect pricing," warning of significant adjustments should unexpected shocks occur.

Beyond policy shifts, 2024 has been marked by technological breakthroughs, particularly in AI, which has fueled a new wave of market investment. However, slowing corporate earnings growth and mounting debt pose challenges for the future. Navigating these uncertainties remains a critical task for investors.

Wall Street Frontline: So the first question is about the Federal Reserve. A couple of organizations, including Nomura on Wall Street, they have made a significant prediction that the Federal Reserve may pause their rate cut cycle in December. And also, a lot of economists now anticipate shallower cuts in 2025 due to the risk of inflation coming back. So what are the key drivers? What do you think?

Peter Cardillo: I think they cut 25 basis points. But then I think they pause in January. And then I think they wait to see if the new administration goes ahead with the tariffs. And if they impose tariffs by a substantial amount without reducing spending, then I think the Fed may actually have to hike rates, maybe late next year, around maybe the third or fourth quarter.

Wall Street Frontline: What makes you think that the Federal Reserve will actually cut 25 basis points in December?

Peter Cardillo: Well, I think all the macro news that we got supports it. And more importantly, inflation. Yes, we have sticky inflation. But it's not really turning up where it would cause the Fed to pause.

Wall Street Frontline: So how many basis points in total do you expect the Federal Reserve to cut in 2025?

Peter Cardillo: That's an open question. I expect another 25 basis points next week, I mean, in December, which would take us down by 100 basis points for the year. And then it all depends on the macro news. And of course, the big question is whether or not tariffs are going to be imposed that could be inflationary.

Wall Street Frontline: Right now, it's the end of 2024.  So what are some of the most significant market trends or movements in the financial markets?

Peter Cardillo: They've been very strong. Equity markets are at record levels. Some of the commodity markets as well, for instance, gold and oil prices, they've been pretty much steady. And we've had a backup in yields. So the bond market suffered somewhat, but not anything significant that would bring us back into a bear market trend in the bond market.

Wall Street Frontline:  You just mentioned that all three major indices, like especially S&P 500, Nasdaq, they have performed really well right now. So how are they comparing to the beginning of this year with your prediction? How are they different?

Peter Cardillo: Oh, well, they're up substantially. And I expect the S&P to close around 6150 by the end of December.

Wall Street Frontline:  Do you think this is going to be sustainable?

Peter Cardillo: It all depends. It all depends on the Fed, on the movements of interest rates, and of course, on earnings. But so far, earnings have been very good. And in fact, we just came off of a strong earnings season again. And of course, going into the first quarter, I expect that the fourth quarter earnings are going to be good, which will be reported in the first quarter of the new year. So basically, the new administration is inheriting a stable and good economy at this time.

Wall Street Frontline:  There are a lot of positive things happened in 2024 for the financial markets, such as the AI breakthrough. So what are some challenges, most significant challenges that the financial market faced in 2024? Can you think about any?

Peter Cardillo: Sure. Inflation, higher interest rates, I should say higher yields, and an unwinding of the earnings growth.

Wall Street Frontline: So based on these challenges and this year's market and economic activity, what should investors be aware of?

Peter Cardillo: Well, I think they have to be aware of one factor at this point, and that is the market is priced to perfection, which simply means that you can't be over-enthusiastic about any one situation. Because if we should get a market reversal, it could be pretty painful.

Wall Street Frontline: If you look broader to the macroeconomy side, so how would you summarize the current state of US economy, considering inflation, employment trends, and all the other economic data?

Peter Cardillo: In terms of the macro outlook for the economy, the economy is growing somewhere between maybe 2.5% and 2.75%, which is a good growth rate. Inflation has come down substantially, but it is somewhat stubborn in some certain cases. And most important are some of the food prices that continue to stay at high levels, and in some cases are even moving higher. So that's a negative in terms of the consumer. But if you look at the retail sales, it's been a pretty good strong year for retail sales. So that suggests that the consumer is still spending. And of course, with the 75 basis points reduction that we had, that also basically gives a little bit of leeway to the consumer, because some of the debt load is reduced in terms of interest rates. So that's positive.

Wall Street Frontline: A lot of organizations on the Wall Street, like for example, Ken Griffin from Citadel, he has said the high debt level is really concerning. Would you agree with him?

Peter Cardillo: Absolutely, the deficits, absolutely, no question about it. You know, and that's always a problem. And hopefully, you know, with the new Congress, the new administration, maybe some of that spending can be cut back or possibly even eliminated, and that would help. But deficits are just out of reach at this time.

Wall Street Frontline:  In terms of the new administration, “Trump 2.0”, what would you expect from his new administration and his new economic policies?

Peter Cardillo: Yeah, well, you know, he's very pro-business, obviously, he's a businessman. So that's a good point. That's not a bad point. He likes less regulations, which is a good point. But he's very adamant when it comes to trade and imposition of tariffs could get ugly if you get into a trade war.

Wall Street Frontline: What sectors do you think would benefit the most from “Trump 2.0”?

Peter Cardillo: Well, I really would not, I don't want to get into that. But, you know, I think the general market would suffer if we get into a trade war.

Wall Street Frontline: OK, so looking back at 2024, what are the most memorable or the defining market moment for you?

Peter Cardillo: Well, I must confess, probably the post-election rally. It was very strong.

Wall Street Frontline: Did you expect that or it's just like unexpected?

Peter Cardillo: I expected a post-election rally if Trump had won. And even if Harris had won, I think we would have, you know, the rally would have continued. Not as vivacious as it was because of Trump winning. But, you know, you can say that euphoria is set in. And just let's hope that that euphoria doesn't change and that investors are not disappointed.

Wall Street Frontline: Would you still expect like high-speed growth for S&P 500 in 2025, or do you think it's going to slow down gradually?

Peter Cardillo: Look, somewhere along the line, the market is going to run into a speed bump. You know, it's been very strong. You know, you're gaining 12%, 13%, 14% on a yearly basis. Somewhere along the line, that's going to run into a brick wall. And, you know, I don't know exactly when, but again, a trade war probably could ignite a pretty severe correction.

Wall Street Frontline: Like what is the most vulnerable part of the market?

Peter Cardillo: I would say technology.

Wall Street Frontline: Technology? Because of the high valuation?

Peter Cardillo: High valuations and, of course, competition.

Wall Street Frontline: A lot of companies in Silicon Valley started this AI race, and right now it's really, really competitive. If you look ahead to 2025, what do you think about the economic outlook for 2025?

Peter Cardillo: Well, I would say that the first half of 2025 will probably continue to grow somewhere between 2%, 2.5%, the GDP growth. And after that, it all depends on Trump's economic agenda. If his agenda causes higher inflation, that will cause the Fed to perhaps rethink the present monetary policy, and that means that they could actually raise rates. And if that happens, then, you know, that would ignite a market correction.