Wall Street Reacts to Fed's Interest Rate Cuts
U.S. stock markets experienced a significant downturn on December 18, 2024, following the Federal Reserve's announcement of its third consecutive interest rate cut this year. The Fed reduced its main interest rate by a quarter point, bringing it to a range of 4.25% to 4.50%. Despite this cut, which was widely anticipated, the Fed's projections for future cuts in 2025 were less aggressive than expected, leading to a sharp decline in stock prices. The S&P 500 fell by 2.6%, the Dow Jones Industrial Average dropped 961 points (2.2%), and the Nasdaq Composite plummeted by 3.5%. This marked one of the worst trading days in four months, with the Dow Jones recording its tenth consecutive decline, a streak not seen since 1974.
Fed's Cautious Approach Amid Economic Uncertainty
During a press conference, Fed Chairman Jerome Powell indicated a cautious approach moving forward, stating that the central bank is entering a new phase of rate adjustments. The Fed's median expectation now suggests only two additional cuts in 2025, totaling half a percentage point, down from four cuts projected just three months prior. This shift in outlook reflects concerns over inflation, which remains above the Fed's target, and the potential economic impact of the incoming Trump administration's policies. Powell emphasized the need for careful evaluation of economic data and risks before making further adjustments, highlighting the complexities of the current economic landscape.
Market Implications and Future Outlook
The reduced expectations for rate cuts have led to increased Treasury yields, putting additional pressure on the stock market. The 10-year Treasury yield rose to 4.49%, while the two-year yield increased to 4.35%. Stocks in sectors sensitive to interest rate changes, such as real estate, suffered notable losses, with S&P 500 homeowners falling by 3.6%. Conversely, some companies like Jabil reported better-than-expected earnings, showcasing resilience amid the broader market decline. As Wall Street navigates these developments, the interplay between Fed policy and economic indicators will be crucial in shaping market dynamics in the coming months.
