NEW YORK — U.S. stock markets experienced significant declines, marking one of the year’s most challenging days. This downturn followed the Federal Reserve’s indication on Wednesday that it might implement fewer economic stimulus measures in 2025 than previously anticipated.
The S&P 500 index dropped by 2.9%, coming close to its largest loss of the year and continuing its retreat from the record high established just weeks before. In addition, the Dow Jones Industrial Average plunged by 1,123 points, or 2.6%, while the Nasdaq composite saw a significant decrease of 3.6%.
On Wednesday, the Fed announced its third interest rate cut of the year, a continuation of the aggressive easing that began in September when rates were lowered from a two-decade peak to bolster the job market. Although Wall Street generally welcomes reduced interest rates, this decrease was already widely anticipated. The more pressing concern for investors is the extent to which the Fed will continue to lower rates in the upcoming year. This uncertainty comes at a time when expectations for a series of cuts in 2025 played a significant role in pushing the U.S. stock market to set record highs 57 times in 2024.
Fed officials unveiled projections indicating a median expectation of two additional cuts to the federal funds rate in 2025, amounting to a reduction of half a percentage point. This was a decrease from the four cuts anticipated just three months earlier.
Fed Chair Jerome Powell stated, “We are in a new phase of the process.” Since September, the central bank has swiftly reduced its main interest rate by a full percentage point, bringing it to a range of 4.25% to 4.50%. When asked about the rationale behind a slower pace of rate cuts, Powell pointed to the overall strength of the job market and recent increases in inflation. Additionally, he noted that uncertainties in the approaching economic landscape would require policymakers to adapt.
While lower rates can stimulate borrowing and investment prices, they also risk fueling inflation. Powell remarked that some Fed officials are already considering the unpredictability associated with a new administration entering the White House, expressing concerns that President-elect Donald Trump’s inclination towards tariffs and other policies may exacerbate inflation alongside economic growth. “When the path is uncertain, you go a little slower,” Powell explained, comparing the situation to driving cautiously on a foggy night.
Cleveland Fed President Beth Hammack was the only official to vote against the recent rate cut, arguing that the central bank should have held steady this time.
The lowered expectations for 2025 rate cuts led to rising Treasury yields in the bond market, contributing further pressure on stocks. The yield on the 10-year Treasury increased to 4.51% from 4.40%, which is a considerable change. Likewise, the two-year yield, which is more closely aligned with Fed action expectations, rose to 4.35% from 4.25%.
On the stock market front, firms that are particularly sensitive to rising interest rates suffered significant losses. Smaller company stocks performed poorly, with many requiring loans for growth and thus feeling the pinch from higher borrowing costs. The Russell 2000 small-cap index plummeted by 4.4%.
In a separate development, General Mills shares fell by 3.1% despite reporting stronger-than-expected profits for the latest quarter. The company, known for its Progresso soups and Cheerios, announced plans to increase investments in its brands to promote growth, prompting a downward adjustment in its profit forecast for the fiscal year.
Nvidia, which has played a major role in driving Wall Street’s previous successes, experienced a decline of 1.1%, continuing a downward trend that has seen its value drop more than 13% from its peak last month and losing ground in nine out of the past ten trading days as its rapid growth slows.
However, not all companies faced losses; Jabil’s stock surged by 7.3% after reporting better-than-expected profits and revenues, while also raising its revenue forecast for the full fiscal year.
Overall, the S&P 500 fell 178.45 points, closing at 5,872.16. The Dow Jones Industrial Average decreased by 1,123.03 to settle at 42,326.87, and the Nasdaq composite dropped by 716.37 to close at 19,392.69.
In international markets, London’s FTSE 100 saw a slight increase of less than 0.1% after inflation jumped to 2.6% in November, its highest level in eight months. The Bank of England is expected to announce its decision on interest rates on Thursday.
Meanwhile, in Japan, even with a 23.7% increase for Nissan Motor Corp. due to reported talks with Honda Motor Co. about closer collaboration, the Nikkei 225 index fell by 0.7%. Honda’s stock, conversely, fell by 3%.
Both Nissan and Honda, along with alliance member Mitsubishi Motors, agreed in August to collaborate on sharing components for electric vehicles and jointly researching autonomous driving technologies in response to the rapidly evolving automotive industry.
