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U.S. stocks tumbled to one of their worst days of the year after the Federal Reserve hinted Wednesday it may deliver fewer shots of adrenaline for the U.S. economy in 2025 than earlier thought.
The S&P 500 fell 2.9%, just shy of its biggest loss for the year from the summer, to pull further from its all-time high set a couple weeks ago. The Dow Jones Industrial Average lost 1,123 points, or 2.6%, and the Nasdaq composite dropped 3.6%.
The Fed said Wednesday it’s cutting its main interest rate for a third time this year, continuing the sharp turnaround begun in September when it started lowering rates from a two-decade high to support the job market. That cut, however, was widely expected.
The bigger question was how much more the Fed could cut next year. A lot is riding on it, particularly after expectations for a series of cuts in 2025 helped the U.S. stock market set an all-time high at least 57 times in 2024.
Fed officials released projections on Wednesday showing the median expectation among them is for two more cuts to the federal funds rate in 2025, or half a percentage point’s worth. That’s down from the four cuts expected just three months ago.
“We are in a new phase of the process,” Fed Chair Jerome Powell said after the central bank quickly eased its main interest rate since September by a full percentage point to a range of 4.25% to 4.50%.
Asked why Fed officials are looking to slow their cuts, Powell pointed to how the job market looks to be performing well overall and how recent inflation readings have picked up. He also cited uncertainties that will require policy makers to react to upcoming, to-be-determined changes in the economy.
While lower rates can offer a boost to the economy by making it cheaper to borrow and boosting prices for investments, they can also offer more fuel for inflation.
Powell said some Fed officials, but not all, are also already trying to incorporate uncertainties inherent in a new administration coming into the White House.
Worries are rising on Wall Street that President-elect Donald Trump’s preference for tariffs and other policies could further juice inflation, along with economic growth.
“When the path is uncertain, you go a little slower,” Powell said. It’s “not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”
One official, Cleveland Fed President Beth Hammack, thought the central bank should not have even cut rates this time around. She was the lone vote against Wednesday’s rate cut.
The reduced expectations for 2025 rate cuts sent Treasury yields rising in the bond market, squeezing the stock market.
The yield on the 10-year Treasury rose to 4.50% from 4.40% late Tuesday, which is a notable move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, climbed to 4.35% from 4.25%.
On Wall Street, stocks of companies that can feel the most pressure from higher interest rates fell to some of the worst losses.
Stocks of smaller companies did poorly, for example. Many need to borrow to fuel their growth, meaning they can feel more pain when having to pay higher interest rates for loans. The Russell 2000 index of small-cap stocks tumbled 4.4%.
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