The Federal Reserve signaled Wednesday that it would provide the U.S. economy with fewer adrenaline boosts in 2025 than previously believed, which sent U.S. equities down to one of their worst days of the year.
The S&P 500 pulled farther from its all-time high established a few weeks ago, down 2.9%, just short of its largest loss of the year from the summer. The Nasdaq composite fell 3.6%, while the Dow Jones Industrial Average fell 1,123 points, or 2.6%.
In keeping with the dramatic turnaround it initiated in September when it began dropping rates from a two-decade high to bolster the job market, the Fed announced Wednesday that it is reducing its main interest rate for the third time this year. However, such cut was generally anticipated.
How much more the Fed cuts next year is the most important question. There is a lot riding on it, especially after the U.S. stock market hit a record high of at least 57 times in 2024 due to expectations of a series of cuts in 2025.
The median expectation among Fed members, according to projections presented on Wednesday, is for two additional rate decreases in 2025, or half a percentage point each. That is less than the four cuts that were anticipated three months ago.
After the Fed swiftly lowered its primary interest rate since September by a full percentage point to a range of 4.25% to 4.50%, Fed Chair Jerome Powell declared, “We are in a new phase of the process.”
Powell gave two reasons when asked why Fed officials are considering slowing their cuts: the job market appears to be doing well overall, and recent inflation readings have increased. He also mentioned the uncertainties that will force policymakers to respond to future, as-yet-unknown shifts in the economy.
Lower interest rates can stimulate the economy by lowering borrowing costs and raising investment prices, but they can also increase inflation.
Powell acknowledged that while not all Fed officials are doing so, some are already attempting to account for the uncertainty that come with a new administration taking office. Wall Street is growing increasingly concerned that President-elect Donald Trump’s penchant for tariffs and other policies may significantly boost economic growth and inflation.
“You go a little slower when the path is uncertain,” Powell remarked. It’s similar to entering a dark room filled with furniture or driving on a cloudy night. Simply slow down.
One official, Cleveland Fed President Beth Hammack, thought the central bank should not have even cut rates this time around. She was the only person who voted against the rate cut on Wednesday.
The stock market was squeezed as Treasury yields increased in the bond market due to lowered expectations for rate cuts in 2025.
A significant change for the bond market occurred late Tuesday when the yield on the 10-year Treasury increased from 4.40% to 4.50%. The two-year yield, which more closely tracks expectations for Fed action, climbed to 4.35% from 4.25%.
On Wall Street, stocks of companies that can feel the most pressure from higher interest rates fell to some of the worst losses.
Stocks of smaller companies did poorly, for example. Many people must borrow money to support their growth, so paying higher interest rates on loans can hurt them more. Small-cap stocks in the Russell 2000 index fell 4.4%.
Elsewhere on Wall Street, General Mills dropped 3.1% despite reporting a stronger profit for the latest quarter than expected. The maker of Progresso soups and Cheerios said it will increase its investments in brands to help them grow, which pushed it to cut its forecast for profit this fiscal year.
Nvidia, thesuperstarresponsible for a chunk of Wall Street s rally to records in recent years, fell 1.1% to extend its weekslong funk. It has dropped more than 13% from its record set last month and fallen in nine of the last 10 days as its big momentum slows.
On the winning end of Wall Street, Jabil jumped 7.3% to help lead the market after reporting stronger profit and revenue for the latest quarter than analysts expected. The electronics company also raised its forecast for revenue for its full fiscal year.
All told, the S&P 500 fell 178.45 points to 5,872.16. The Dow Jones Industrial Average dropped 1,123.03 to 42,326.87, and the Nasdaq composite skidded 716.37 to 19,392.69.
In stock markets abroad, London s FTSE 100 edged up by less than 0.1% after data showedinflation accelerated to 2.6%in November, its highest level in eight months. The Bank of England is also meeting on interest rates this week and will announce its decision on Thursday.
In Japan, where the Bank of Japan will wrap up its own policy meeting on Friday, the Nikkei 225 slipped 0.7%. That was despite a 23.7% jump forNissan Motor Corp.,which said it was in talks on closer collaboration with Honda Motor Co., though no decision had been made on a possible merger. Honda Motor s stock lost 3%.
Nissan, Honda and Nissan alliance member Mitsubishi Motors Corp. agreed in August to share components for electric vehicles like batteries and to jointly research software for autonomous driving to adapt better to dramatic changes in the auto industry.
— Stan Choe, The Associated Press
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