The stock market experienced a significant downturn on Wednesday following the Federal Reserve’s announcement of a 25-basis-point interest rate cut, coupled with a projection of fewer rate reductions in the coming year than previously anticipated. This unexpected shift in monetary policy sent shockwaves through the financial markets, triggering a widespread sell-off.
Table Content:
Major Indices Suffer Steep Losses
All three major U.S. stock indices reversed earlier gains and ended the day with substantial losses. The Dow Jones Industrial Average plummeted by approximately 2.6%, shedding over 1,000 points and marking its tenth consecutive decline. This losing streak represents the Dow’s longest period of consecutive losses since 1974. The S&P 500 and the tech-heavy Nasdaq Composite also suffered significant blows, falling by roughly 3% and over 3.5%, respectively.
Federal Reserve Revises Rate Cut Projections
The Federal Reserve’s decision to reduce the projected number of interest rate cuts in 2025 from four to two reflects a reassessment of the economic outlook. Ten Fed officials now anticipate only two rate cuts next year, citing upward revisions in projections for core inflation and economic growth, along with a lower unemployment rate forecast for 2025.
Federal Reserve Chair Jerome Powell attributed the slower pace of anticipated rate cuts to higher inflation readings and expectations for continued elevated inflation in the future. Powell emphasized a cautious approach to further rate reductions, contingent on the economy and labor market remaining robust.
“Hawkish Cut” and Market Reactions
The Federal Reserve’s decision was not unanimous, with newly appointed Cleveland Fed President Beth Hammack dissenting in favor of maintaining current interest rates. This dissent, coupled with the reduced rate cut projections, led some analysts to characterize the move as a “hawkish cut,” raising concerns that the Federal Reserve might maintain higher interest rates for a longer duration than initially anticipated.
The 10-year Treasury yield surged by nearly 11 basis points following Powell’s press conference, reaching just under 4.5%. Rate-sensitive sectors of the market experienced significant sell-offs, with the small-cap Russell 2000 index tumbling roughly 4% and the Real Estate sector among the worst performers in the S&P 500, also plunging by nearly 4%. The Dow’s prolonged losing streak, now its longest in roughly half a century, has dampened the overall positive sentiment of a strong rally in 2024, particularly impacting the blue-chip index which has lagged behind the tech-driven surge.
Megacap Tech Stocks Decline Sharply
The market downturn significantly impacted megacap technology stocks, with Tesla leading the decline among the S&P 500 components, closing down over 8%. Other tech giants, including Amazon, Apple, and Microsoft, experienced declines exceeding 2%. Facebook’s parent company, Meta, and Google’s parent company, Alphabet, also saw share prices drop by over 3%, while AI chipmaker Nvidia shed a little over 1%.
Conclusion: Market Uncertainty and Future Outlook
The Federal Reserve’s revised projections for interest rate cuts and inflation have injected a degree of uncertainty into the market. The reduced expectations for monetary easing, coupled with concerns about persistent inflation and the potential impact of the incoming Trump administration’s policies, have created a cautious environment for investors. As the market navigates this period of uncertainty, attention will remain focused on economic data, corporate earnings, and policy developments for further guidance.
