NEW YORK — U.S. stocks faced a major downturn on Wednesday, marking one of the steepest drops of the year, as the Federal Reserve signaled a more conservative approach to interest rate cuts for 2025 than previously anticipated.
The S&P 500 slid 2.9%, nearing its worst performance of the year, further distancing itself from the record highs reached earlier this month. The Dow Jones Industrial Average dropped 1,123 points, or 2.6%, while the Nasdaq composite tumbled 3.6%.
Fed Adjusts Rate-Cutting Pace
On Wednesday, the Federal Reserve announced its third interest rate cut of the year, continuing a shift that began in September. The reduction aimed to support the job market by easing borrowing costs.
While Wall Street generally favors lower interest rates, this particular cut was widely expected. The real shock came from the Fed’s updated projections, which scaled back the anticipated rate cuts for 2025.
The central bank now predicts just two rate cuts next year, totaling a half-percentage-point decrease, compared to the four cuts forecasted three months ago.
“We’re entering a new phase,” said Fed Chair Jerome Powell, referencing the slowing pace of rate reductions.
Why the Fed is Cautious
Powell cited strong job market performance and rising inflation as reasons for the slower rate-cutting pace. The uncertainty surrounding the incoming administration under President-elect Donald Trump also played a role in the Fed’s cautious approach.
“When the path ahead is unclear, it’s prudent to proceed more cautiously,” Powell explained, comparing the situation to driving on a foggy night.
Despite the rate cut, Cleveland Fed President Beth Hammack dissented, arguing that the cut was unnecessary given current economic conditions.
Treasury Yields Spike, Pressuring Stocks
The reduced expectations for 2025 rate cuts triggered a rise in Treasury yields, adding strain to the stock market.
The 10-year Treasury yield climbed to 4.51% from 4.40%, while the 2-year yield, closely tied to Fed policy expectations, increased to 4.35% from 4.25%.
Higher yields can weigh heavily on stocks, particularly for companies that rely on borrowing for growth.
Market Impact: Key Losers and Gainers
Smaller companies, which are more sensitive to interest rate changes, suffered significant losses. The Russell 2000 index of small-cap stocks plunged 4.4%.
Notable individual stock movements included:
- General Mills: Fell 3.1% after lowering its profit forecast despite reporting stronger-than-expected earnings.
- Nvidia: Declined 1.1%, extending a recent slump that has seen the stock lose over 13% from its peak last month.
- Jabil: Surged 7.3%, leading gains after exceeding profit and revenue expectations and raising its full-year revenue forecast.
Global Market Reactions
Overseas, markets showed mixed results:
- London: The FTSE 100 edged up slightly, supported by a rise in November inflation to its highest in eight months.
- Japan: The Nikkei 225 fell 0.7%, despite Nissan Motor Corp. surging 23.7% on news of potential expanded collaboration with Honda Motor Co.
Major Indexes at a Glance
- S&P 500: Dropped 178.45 points, closing at 5,872.16.
- Dow Jones Industrial Average: Fell 1,123.03 points, settling at 42,326.87.
- Nasdaq Composite: Declined 716.37 points, ending at 19,392.69.
As markets digest the Fed’s latest moves, investors remain focused on how the central bank’s cautious approach will impact the broader economy heading into 2025.
Source: AP News
Leave a comment