U.S. stocks fell in one of the worst days of the year after the Federal Reserve said Wednesday it may provide fewer shots of adrenaline for the economy in 2025 than previously estimated.
The S&P 500 fell 178 points, or 3%, taking it further from its all-time high set just weeks ago. The Dow Jones Industrial Average fell 1,123 points, or 2.6%, while the Nasdaq Composite dropped 3.6%.
The Fed said on Wednesday that it is Cut your benchmark interest rate That's the third time this year, continuing a sharp turnaround that began in September, when it began cutting rates from two-decade highs to support the job market. Wall Street loves low interest rates, but the Dec. 18 cut was widely expected.
Why is the stock market falling today?
Investors were troubled by the Fed's forecast of fewer cuts in 2025, although many economists were already lowering their expectations given sticky inflation.
“The market has a really bad habit of overreacting to Fed policy moves,” Jamie Cox, managing partner at Harris Financial Group, said in an analyst note. “The Fed hasn't done or said anything that deviates from what the market expected – it's more like, I'm going for the Christmas holidays, so I'll sell and start over next year.”
The big question is how much more the Fed can cut next year. There is a lot riding on it, especially after expectations of a series of cuts in 2025 have helped the US stock market reach an all-time high of 57 times so far in 2024.
Fed officials released estimates Wednesday that the average expectation among them is two more cuts in the federal funds rate in 2025, or a reduction of half a percentage point. That's less than the four cuts he had expected just three months earlier.
“We are in a new phase of the process,” Fed Chairman Jerome Powell said. The central bank has already lowered its key interest rate by a full percentage point since September, to a range of 4.25% to 4.50%.
What happened in the stock market today?
Asked why Fed officials want to slow the pace of cuts, Powell pointed to how the job market is performing well overall and how inflation readings have picked up recently. He also cited the uncertainties that policymakers will need to react to upcoming, scheduled changes in the economy.
While low rates can hurt the economy by making borrowing cheaper and raising prices for investment, they can also provide more fuel for inflation.
Powell said some Fed officials, but not all, are already trying to incorporate the uncertainties inherent in the new administration coming into the White House. Concerns are growing on Wall Street that President-elect Donald Trump's preference for tariffs and other policies could further depress economic growth as well as inflation.
“When the going is uncertain, you go a little slower,” Powell said. It's “not unlike driving on a foggy night or walking through a dark room full of furniture. You just go slower.”
One official, Cleveland Fed President Beth Hammack, thought the central bank should not have cut rates this time. She was the lone vote against Wednesday's rate cut.
Wall Street had the worst performance
Treasury yields in the bond market rose as expectations of a rate cut in 2025 diminished, putting pressure on the stock market.
The yield on the 10-year Treasury rose to 4.51% from 4.40% late Tuesday, a notable move for the bond market. The two-year yield, which more closely tracks expectations of Fed action, rose to 4.35% from 4.25%.
On Wall Street, stocks of companies that could feel the most pressure from higher interest rates fell with the worst losses.
For example, stocks of smaller companies performed particularly poorly. Many people need to borrow to fuel their growth, which means they may feel more pain when paying higher interest rates for loans. The Russell 2000 index of small-cap stocks fell 4.4%.
Elsewhere on Wall Street, General Mills fell 3.1% despite reporting stronger-than-expected profit in the latest quarter. The maker of Progresso soup and Cheerios said it would increase its investments in the brands to help them grow, which prompted it to cut its forecast for profit this fiscal year.
Nvidia, the superstar stock responsible for Wall Street's record rallies in recent years, fell 1.1% to extend its week-long funk. It has fallen more than 13% from its record set last month and has fallen in nine of the last 10 days as its big momentum has slowed.
“As we wrote in our 2025 Outlook a few weeks ago, stretched conditions and sentiment left stocks vulnerable to a selloff,” Jeff Buchbinder, chief equity strategist at LPL Financial, said in a note about today's market selloff. Is.” “The big jump in inflation expectations and the associated bond selling was a convenient excuse. Once the support from the tech ran out, no other group was able to step in to fill the gap.”