Stocks closed sharply lower yesterday after the Fed's announcement on rates.

The Fed cut by 25 basis points as expected, bringing the Fed Funds midpoint to 4.38%. Right where they had projected the year would end just a few months ago.

But the surprise was that they lowered their projection for next year to just two rate cuts (presumably 25 bps each), from their original estimate of four cuts. That would put rates at 3.88% (3.9%) by the end of 2025 vs. expectations for 3.4%.

And the fewer projected cuts come as a result of slower expected progress on inflation. The Fed had previously expected inflation would reach its desired 2% target by the end of next year. But now they're pushing that target out to 2026.

The extreme selloff, however, is curious. I suspect yesterday's selloff had more to do with profit taking following the spectacular rally since the election, with many believing it ran too far too fast.

Because aside from that, the Fed had positive things to say about the economy. Including that "the U.S. economy has just been remarkable," and that Mr. Powell feels "very good about where the economy is." In fact, that was a phrase he repeated several times.

All in all, inflation has moderated, and interest rates are still likely to fall further. Moreover, with the economy continuing to grow (they see 2% median GDP growth for the next few years out, on top of the 2%+ we're seeing this year) bodes well for the market.

Of course, bull markets regularly pull back. And that is likely what we're seeing now.

But the economic outlook is decidedly positive. And that's the takeaway.

However, adding to complications was word that the House and Senate have each come up with different versions of a short-term funding bill (also known as a continuing resolution or CR), that has many in the beltway, including the incoming administration, non-too happy. This Congress only has until Friday, 12/20 to agree and pass a bill, otherwise, the government technically shuts down.

Congress being Congress, they are likely to go down to the wire. And while it's likely a compromise will be had (nobody really wants to shut the government down right before Christmas), you never know.

In other news, yesterday's MBA Mortgage Applications were off -0.7% w/w vs. last week's 5.4%, while purchases were up 1.4% vs. last week's -4.1%, with refi's down -2.6% vs. last week's 27.2%.

The Housing Starts and Permits report showed Starts at 1.289 million units (annualized) vs. last month's 1.312M and views for 1.340M. And Permits were at 1.505M vs. last month's 1.419M and estimates for 1.430M.

And the Atlanta Fed Business Inflation Expectations came in at 2.0% y/y vs. last month's 2.2% pace.

Today we'll get the third and final estimate for Q3 GDP, Weekly Jobless Claims, the Philadelphia Fed Manufacturing Index, the Kansas City Fed Manufacturing Index, Leading Indicators, and Existing Home Sales.

But the report everybody is now waiting on is Friday's Personal Consumption Expenditures (PCE) index, which is the Fed's preferred inflation gauge.

And after the Fed essentially cited a stubbornness in inflation for the adjustment on future rate cuts, all eyes will be on Friday's PCE.

In the meantime, we've got a whole day today to digest what just happened.

But with a strong economy, and the outlook for that continuing, I would be looking at a pullback as a buying opportunity rather than a place to sell.

See you tomorrow,