US stocks plummeted in one of their worst days of the year after the Federal Reserve forecast on Wednesday that it may provide less of a jolt to the economy in 2025 than it had previously forecast.
The S&P 500 fell 178 points, or 3%, away from its all-time high of a couple of weeks ago. The Dow Jones Industrial Average lost 1,123 points, or 2.6%, while the Nasdaq fell 3.6%.
The Fed said yes on Wednesday reducing its benchmark interest rate for the third time this year, continuing the sharp turnaround that began in September when it began cutting rates from a two-decade high to support the labor market. Wall Street loves lower interest rates, but the Dec. 18 cut had been long-awaited by Wall Street.
Why is the stock market down today?
Investors were jittery about the Fed’s forecast of fewer cuts in 2025, although many economists had already been limiting their expectations due to sticky inflation.
“Markets have a very bad habit of overreacting to Fed policy moves,” Jamie Cox, managing partner at Harris Financial Group, said in an analyst note. “The Fed didn’t do or say anything that deviated from what the market expected – this looks more like I’m going on Christmas break, so I’ll sell and start next year.”
The bigger question centers on how much more the Fed might cut next year. There’s plenty to do, especially after expectations of a series of cuts in 2025 helped the US stock market set an all-time high of 57 times in 2024.
Fed officials released projections on Wednesday showing that the median expectation among them is for two more cuts in the federal funds rate in 2025, or the equivalent of half a percentage point. That’s down from the four cuts they were expecting just three months ago.
“We are in a new phase of the process,” Fed Chairman Jerome Powell said. The central bank has already quickly cut its main interest rate by a full percentage point, to a range of 4.25% to 4.50%, since September.
What happened to the stock market today?
Asked why Fed officials are looking to slow the pace of cuts, Powell pointed to how the labor market appears to be doing well overall and how recent inflation readings have picked up. He also cited the uncertainties that will require policymakers to react to upcoming changes in the economy to determine.
While lower rates can boost the economy by making it cheaper to borrow and raising the prices of investments, they can also provide more fuel for inflation.
Powell said some Fed officials, but not all, are also trying to internalize the uncertainties inherent in the arrival of a new administration in the White House. Concerns are growing on Wall Street that President-elect Donald Trump’s preference for tariffs and other policies could raise inflation, along with economic growth.
“When the going is uncertain, you go a little slower,” Powell said. “It’s no different than 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. It was the only vote against Wednesday’s rate cut.
Wall Street’s worst performers
Reduced expectations for rate cuts in 2025 pushed up Treasury yields in the bond market, compressing the stock market.
The 10-year Treasury yield rose to 4.51% from 4.40% late Tuesday, a remarkable move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, rose to 4.35% from 4.25%.
On Wall Street, shares of companies that may feel the most pressure from higher interest rates fell to some of the worst losses.
Shares of smaller companies fared particularly poorly, for example. Many need to borrow to fuel their growth, which means they may feel more pain when they have to pay higher interest rates on loans. The Russell 2000 index of small-cap stocks fell 4.4%.
Elsewhere on Wall Street, General Mills fell 3.1% despite reporting a stronger-than-expected quarterly profit. The maker of Progresso soup and Cheerios said it will increase its investments in brands to help them grow, prompting it to cut its profit forecast this fiscal year.
Nvidia, the superstar responsible for some of Wall Street’s record in recent years, fell 1.1% to extend its week-long funk. It’s down more than 13% from its record high set last month and has fallen in nine of the past 10 days as its big momentum slows.
“As we wrote in our 2025 forecast a couple of weeks ago, stretched positioning and sentiment left stocks vulnerable to a selloff,” said Jeff Buchbinder, equity strategist at LPL Financial in a note on the current market sale. “The big jump in inflation expectations and related bond selling was a convenient excuse. Once the support for the technology evaporated, no other group could step in to fill that void.”