Wall Street experienced a significant sell-off on Wednesday following the Federal Reserve’s decision to cut interest rates by 25 basis points but indicate fewer cuts than anticipated for the coming year. This unexpected shift in monetary policy sent shockwaves through the market, reversing earlier gains and resulting in steep losses across major indices.
The Dow Jones Industrial Average plummeted by over 1,000 points, marking a 2.6% decline and extending its losing streak to a tenth consecutive session. This is the longest downturn for the Dow since 1974. The S&P 500 and the Nasdaq Composite also suffered substantial losses, falling by roughly 3% and more than 3.5%, respectively.
The Fed’s revised outlook stems from adjusted projections for core inflation and economic growth in 2025, which were revised upwards, alongside a lower unemployment rate forecast. These factors contributed to the decision to reduce the expected number of rate cuts from four, as projected in September, to just two.
“The slower pace of cuts for next year really reflects both the higher inflation readings we had this year and the expectation inflation will be higher,” Federal Reserve Chair Jerome Powell explained during the post-decision press conference. He emphasized a cautious approach to future cuts as long as the economy and labor market remain robust.
This decision, however, was not unanimous. Cleveland Fed President Beth Hammack dissented, favoring maintaining the current rate. This dissent, as noted by Capital Economics Chief North America Economist, signifies a “hawkish cut,” raising concerns that the Fed might maintain higher interest rates for an extended period.
The 10-year Treasury yield reacted swiftly to Powell’s comments, surging nearly 11 basis points to hover just below 4.5%. Rate-sensitive sectors bore the brunt of the sell-off, with the small-cap Russell 2000 index tumbling approximately 4% and the Real Estate sector experiencing a similar decline within the S&P 500.
The Dow’s prolonged losing streak, a stark contrast to the overall market rally in 2024, reflects its composition. With a limited representation from the high-flying technology sector, the Dow has lagged behind the tech-driven surge.
Megacap tech stocks, often market leaders, also experienced significant declines. Tesla led the downturn within the S&P 500, with shares plummeting over 8%. Amazon, Apple, and Microsoft each fell by more than 2%, and Facebook parent Meta Platforms and Google’s Alphabet both saw drops exceeding 3%. Even Nvidia, a standout performer in recent months, shed over 1%.
The market’s reaction underscores the significant impact of the Federal Reserve’s forward guidance on investor sentiment. While the rate cut was anticipated, the signal of fewer cuts in 2025, coupled with upward revisions to inflation and growth forecasts, triggered a widespread reassessment of market risks and future prospects. This sell-off serves as a reminder of the ongoing challenges in navigating a complex and evolving economic landscape.
