U.S. stocks fell on one of their worst days of the year after the Federal Reserve forecast Wednesday that it could bring less of an adrenaline rush to the economy in 2025 than it expects had previously planned.
The S&P 500 fell 178 points, or 3%, taking it further away from its all-time high set a few weeks ago. The Dow Jones Industrial Average lost 1,123 points, or 2.6%, while the Nasdaq composite fell 3.6%.
The Fed said Wednesday that it drop in its reference interest rate for the third time this year, continuing the sharp turnaround that began in September when it began lowering interest rates from their highest level in two decades to support the labor market. Wall Street appreciates the drop in interest rates, but the December 18 cut was widely expected by Wall Street.
Why is the stock market down today?
Investors were unsettled by the Fed’s forecast that there would be fewer cuts in 2025, even though many economists had already lowered their expectations given continued inflation.
“Markets have a very bad habit of overreacting to Fed policy decisions,” Jamie Cox, managing partner at Harris Financial Group, said in an analyst note. “The Fed hasn’t done or said anything that deviated from what the market expected. It’s more like: I’m going away for Christmas break, so I’m going to sell and start next year.”
The big question is how much more cuts the Fed could make next year. A lot hinges on that, especially after expectations of a round of cuts in 2025 helped the U.S. stock market hit an all-time high of 57 times so far in 2024.
Fed officials released projections Wednesday showing they expect on average two additional cuts to the federal funds rate in 2025, the equivalent of half a percentage point. That’s down from the four cuts they expected just three months ago.
“We are in a new phase of the process,” said Fed Chairman Jerome Powell. The central bank has already quickly lowered its main interest rate by one percentage point, to a range of 4.25% to 4.50%, since September.
What happened to the stock market today?
When asked why Fed officials were seeking to slow the pace of their cuts, Powell pointed out that the labor market appeared to be doing well overall and that recent inflation numbers had recovered. He also discussed the uncertainties that will require policymakers to respond to upcoming and undetermined changes in the economy.
While lower rates can harm the economy by making borrowing cheaper and raising investment prices, they can also further fuel inflation.
Powell said some, but not all, Fed officials were already trying to come to terms with the uncertainties inherent in a new administration in the White House. Concerns are growing on Wall Street that President-elect Donald Trump’s preference for tariffs and other policies could further spur inflation, as well as economic growth.
“When the path is uncertain, you go a little slower,” Powell said. It’s “a bit like driving on a foggy night or walking into a dark room full of furniture. You just have to slow down.”
One official, Cleveland Fed President Beth Hammack, said the central bank shouldn’t even have cut rates this time. She was the only one to vote against Wednesday’s rate cut.
Wall Street’s worst performances
Reduced expectations for rate cuts by 2025 have pushed Treasury yields higher in the bond market, weighing on the stock market.
The yield on 10-year Treasury bills rose from 4.40% Tuesday evening to 4.51%, a notable development for the bond market. The two-year yield, which more closely tracks expectations for Fed action, rose to 4.35% from 4.25%.
On Wall Street, shares of companies that may feel the most pressure from rising interest rates have fallen and posted some of the worst losses.
Small company stocks, for example, have performed particularly poorly. Many need to borrow to fuel their growth, which means they may feel even more pain when they have to pay higher interest rates on their loans. The Russell 2000 index of small-cap stocks fell 4.4%.
Elsewhere on Wall Street, General Mills fell 3.1% despite posting higher-than-expected profit for the latest quarter. The maker of Progresso and Cheerios soups said it would increase investments in brands to help them grow, prompting it to cut its profit forecast for this fiscal year.
Nvidia, the superstar stock responsible for much of Wall Street’s rally to record highs in recent years, fell 1.1% to extend its funk by a week. It has fallen more than 13% from its record set last month and has fallen in nine of the last 10 days as its momentum slows.
“As we wrote in our 2025 outlook a few weeks ago, tight positioning and sentiment have left stocks vulnerable to a selloff,” Jeff Buchbinder, chief equity strategist at LPL Financial, said in a note on the market sell-off today. “The sharp rise in inflation expectations and the resulting bond sell-off was a convenient excuse. Once support for tech evaporated, no other group was able to step in to fill this gaping hole .”
