Market Woes Deepen as Fed Signals Fewer Rate Cuts in 2025

In a dramatic turn, U.S. stocks experienced their second-largest plunge of the year following indications from the Federal Reserve that it may scale back the number of interest rate cuts planned for 2025. On Wednesday, the S&P 500 dropped 2.9%, marking a significant retreat from its record high achieved just weeks prior. Meanwhile, the Dow Jones Industrial Average shed over 1,100 points, and the Nasdaq composite tumbled 3.6%. In Canada, the S&P/TSX composite index closed down 562.71 points, ending the day at 24,557.

The Fed’s announcement included a third rate cut for 2024, a widely anticipated move aimed at supporting the job market. However, the updated projections revealed a shift in strategy, with officials now expecting only two more rate cuts in 2025—a notable reduction from the four cuts forecasted three months ago.

Powell Advocates Caution Amid Uncertainty

Fed Chair Jerome Powell emphasized a measured approach, citing robust job market performance, rising inflation concerns, and the unpredictable economic implications of a new administration. “When the path is uncertain, you go a little slower,” Powell remarked, likening the cautious stance to navigating a foggy night.

The reduced expectations for rate cuts had immediate effects, driving Treasury yields higher. The 10-year Treasury yield rose to 4.49% from 4.40%, while the two-year yield climbed to 4.35% from 4.25%, amplifying pressure on the stock market.

Stocks Under Pressure

Interest rate-sensitive sectors bore the brunt of the market fallout. Real estate stocks in the S&P 500 dropped 3.6%, while the Russell 2000 index of small-cap companies fell 3.4%, nearly double the overall S&P 500 decline.

Corporate earnings also painted a mixed picture. General Mills slid 3% despite reporting better-than-expected profits, as the company announced increased investments in its brands, prompting a downward revision of its annual profit forecast. On the flip side, Jabil Inc. surged 5.3% after surpassing earnings expectations and raising its revenue forecast for the fiscal year.

Nvidia, a key driver of recent market rallies, continued its decline, losing 0.9% and extending its losses to over 12% from its peak last month.

Global Markets React

International markets offered a varied response. In London, the FTSE 100 edged up 0.1% after inflation reached an eight-month high of 2.6%. The Bank of England’s interest rate decision, set for Thursday, is highly anticipated. In Japan, the Nikkei 225 slipped 0.7%, with Nissan Motor Corp. surging 23.7% on reports of deeper collaboration talks with Honda, despite Honda’s stock declining 3%.

As central banks worldwide grapple with evolving economic conditions, the Federal Reserve’s cautious tone has set a precedent for how monetary policy could shape global markets in the coming years.