US stock markets endured one of their most severe declines of the year on Wednesday after the Federal Reserve signaled a shift in its monetary policy trajectory. The S&P 500 fell 2.9%, narrowly missing its largest loss of 2024, while the Dow Jones Industrial Average plummeted by 1,123 points, or 2.6%. The tech-heavy Nasdaq composite suffered the worst drop, declining 3.6%.
The central bank announced its third rate cut of the year, lowering its main interest rate to a range of 4.25% to 4.50%. However, it was the Fed’s updated projections for 2025 that rattled investors: Policymakers now anticipate only two additional cuts next year, down from four projected just three months ago.
“We are in a new phase of the process,” Fed Chair Jerome Powell said, explaining the tempered outlook as a response to robust job market performance, rising inflation readings, and economic uncertainties, including the upcoming Trump administration’s policies.
Bond yields climb, stock market feels the squeeze
Treasury yields surged following the Fed’s announcement, exerting additional pressure on stocks. The yield on the 10-year Treasury rose to 4.51% from 4.40%, while the two-year yield, more sensitive to Fed actions, increased to 4.35% from 4.25%.
Higher yields typically hurt stock valuations, particularly for companies reliant on borrowing to drive growth. The Russell 2000 index of smaller companies tumbled 4.4%, reflecting the acute impact of rising interest rates on smaller-cap stocks.
“We’re seeing the market recalibrate for a ‘higher for longer’ rate environment,” said Sam Stovall of CFRA Research. “The Fed’s announcement caught investors off guard, eroding confidence in the expected pace of rate reductions.”
Winners and losers on Wall Street
Among individual stocks, General Mills fell 3.1% despite better-than-expected quarterly profits, as its lowered profit forecast for the year spooked investors. Nvidia, a significant driver of this year’s market rally, dropped 1.1%, extending its losses to over 13% since its record high last month.
Conversely, Jabil surged 7.3% after reporting stronger-than-expected quarterly earnings and raising its full-year revenue forecast.
Global markets and economic uncertainty
Global markets displayed mixed reactions. In London, the FTSE 100 rose marginally by less than 0.1%, buoyed by data showing UK inflation at an eight-month high. The Bank of England is expected to keep rates unchanged when it announces its decision on Thursday.
Japan’s Nikkei 225 fell 0.7%, even as Nissan shares jumped 23.7% on reports of potential collaboration with Honda. Meanwhile, Mitsubishi Motors, partly owned by Nissan, saw its shares soar nearly 20%.
Economic outlook clouds amid inflation and political shifts
Powell noted that while rate cuts could stimulate economic growth, they also risk exacerbating inflation. “When the path is uncertain, you go a little slower,” he said, likening the Fed’s approach to navigating a foggy night.
Lingering inflationary pressures and the transition to the Trump administration have introduced additional variables into the Fed’s calculus. Powell acknowledged that some officials are already weighing the implications of potential fiscal policy changes, including tariffs and spending initiatives.
Cleveland Fed President Beth Hammack was the lone dissenter in Wednesday’s decision, arguing against the rate cut.
As Wall Street digests the Fed’s outlook, concerns grow that the anticipated “Santa Claus rally” may be replaced by further volatility, with analysts suggesting that traders may lock in profits amid uncertainty.
(With inputs from agencies)
