U.S. stock indexes fell sharply on Wednesday after the Federal Reserve hinted that next year may provide fewer shots of adrenaline to the economy than it had originally thought.
He S&P 500 It lost 178 points (2.9%) and moved a little further away from its all-time high reached at the beginning of the month. The Industrial Average Dow Jones lost 1,123 points (2.6% down) and the composite Nasdaq 716 points (3.6%).
The Federal Reserve on Wednesday announced the cut of its main interest rate for the third time this year, continuing the abrupt change in trend that began in September, when it began to relax rates from two-decade highs to support the slowdown in the labor market. Wednesday’s cut was widely expected.
The bigger question is what the Federal Reserve planned to do next year. The stakes are high, especially after expectations of a series of rate cuts in 2025 helped the US stock market to at least record highs. 57 times in 2024.
Fed officials released projections showing the median expectation among them is for two more interest rate cuts in 2025. That’s down from four three months ago. This measure would reduce the federal funds rate by half a percentage point. This would be half of the relief provided by the Federal Reserve in 2024, when it cut the federal funds rate by one percentage point to between 4.25% and 4.50%.
Noting how much the Fed cut this year, Fed Chair Jerome Powell said: “We may therefore be more cautious in considering further adjustments to our policy rate.”
Officials are reducing their cuts forecasts amid growing uncertainties. The pace of inflation has picked up somewhat recently, after slowing almost to the Federal Reserve’s 2% target from its peak above 9%. TThere are also concerns that President-elect Donald Trump’s preference for tariffs and other policies could further spur inflation, along with economic growth.
While lower rates can offer a boost to the economy by making it cheaper for American households and businesses to borrow, along with lowering investment prices, they can also offer more fuel for inflation.
One official, Beth Hammack, president of the Cleveland Fed, said the central bank shouldn’t have even lowered rates this time. She was the only vote against Wednesday’s rate cut.
Reduced expectations of rate cuts in 2025 pushed up Treasury yields in the fixed income market.
The 10-year Treasury yield rose to 4.51% from 4.40% on Tuesdaywhich represents a notable movement for the fixed income market. The two-year yield, which more closely tracks the Fed’s expectations, rose to 4.35% from 4.25%.
On Wall Street, stocks of companies that may feel the most pressure from higher interest rates suffered some of the worst losses.
For example, stocks of smaller companies suffered especially. Many need to borrow to fuel their growth, which means they may feel more pain from having to pay higher interest rates on loans. The Russell 2000 index of small caps fell 4.4%.
In the foreign stock marketsLondon’s FTSE 100 rose less than 0.1% after data showed that inflation accelerated to 2.6% in November, its highest level in eight months. The Bank of England also meets this week to review interest rates and will announce its decision on Thursday.
In Japan, where the Bank of Japan will conclude its monetary policy meeting on Friday, the Nikkei 225 fell 0.7%. This was despite a 23.7% rise from Nissan, which declared it was in talks for closer collaboration with Honda, although no decision had been made on a possible merger. Honda shares lost 3%.
Nissan, Honda and Mitsubishi, a member of the Nissan alliance, agreed in August to share electric vehicle components, such as batteries, and jointly research software for autonomous driving, to better adapt to the drastic changes in the auto industry.
(With information from AP)
