On December 18, 2024, U.S. stock markets experienced a significant downturn after the Federal Reserve announced a 0.25% interest rate cut, bringing the federal funds rate to a range of 4.25% to 4.5%. Despite this reduction, the Fed’s indication of a slower pace of rate cuts in 2025 than previously anticipated led to investor disappointment and a substantial market sell-off.
The Dow Jones Industrial Average fell by 1,123 points, or 2.6%, closing at 42,326.87. This decline marked the Dow’s tenth consecutive losing session, the longest streak since October 1974.
The S&P 500 dropped 2.9%, nearing its worst loss for the year, while the Nasdaq Composite declined by 3.6%, as reported by The Guardian.
According to Yahoo!, Federal Reserve Chair Jerome Powell cited a robust job market and rising inflation as reasons for slowing the pace of rate cuts. Powell explained, “The slower pace of cuts for next year really reflects both the higher inflation readings we had this year and the expectation inflation will be higher.” He later added that as long as the economy and labor market stay “solid,” “we can be cautious as we consider further cuts.” The Fed’s summary of economic projections indicated plans for only two additional rate cuts in 2025, a more conservative approach than investors had anticipated.
Chris Zaccarelli, CIO at Northlight Asset Management, said in a statement reported by CNN, “The market was underwhelmed by the likely future path of interest rates.” This cautious outlook contributed to a rise in Treasury yields, with the 10-year yield spiking to 4.5%, further pressuring equities.
The market reaction was swift and broad-based. Major tech stocks, including Tesla, experienced significant declines, with Tesla’s stock falling by 8.3%. Additionally, Micron Technology’s earnings report and weak guidance led to a sharp after-hours drop in its stock, impacting the semiconductor sector.
Small-cap stocks were particularly affected, with the Russell 2000 declining by 4.4%. The VIX volatility index, often referred to as Wall Street’s “fear gauge,” surged by 74%, indicating heightened market anxiety.
Despite the prolonged downturn, the Dow remains 14% higher for the year, up more than 5,000 points in 2024. Following the election results, markets initially rallied as investors welcomed the avoidance of recounts and legal disputes. According to NPR, there has also been considerable optimism surrounding Trump’s pledges to reduce regulations and lower taxes.
Analysts suggest that while the immediate reaction reflects investor disappointment, the underlying economic fundamentals remain reasonably strong. Investors are advised to stay vigilant and consider reducing exposure due to market volatility, although a potential rebound could follow the Fed meeting.
As markets continue to digest the Fed’s latest policy decisions and projections, attention will shift to upcoming economic data releases and corporate earnings reports for further indications of the economy’s trajectory and potential impacts on investment strategies.
