On Wednesday, the stock market took a sharp downturn following news that the Federal Reserve might reduce interest rates less frequently in 2025 than previously anticipated. This news, seemingly mild at first glance, triggered significant market reactions.
The Dow Jones Industrial Average fell sharply by 2.6%, losing 1,123 points to close at 42,327. Similarly, the S&P 500 dropped nearly 3%, ending the day at 5,872, while the Nasdaq Composite decreased by 3.6% to close at 19,393.
Recently, both the S&P 500 and Nasdaq had been performing robustly, reaching or hovering near all-time highs, largely driven by expectations of forthcoming rate cuts from the Fed.
However, December has been particularly tough for the Dow, which experienced its 10th straight day of losses on Wednesday—the longest losing streak since 1974. A decline of over a thousand points in a single day is notably uncommon.
On the same day, the Federal Reserve did lower its benchmark interest rate by a quarter point, a decision that was anticipated and generally welcomed by forecasters.
Fed Signals a Slower Pace for Future Rate Cuts in 2025
The Federal Reserve also indicated a significant slowdown in the pace of rate reductions for the upcoming year, attributing this decision partly to a resurgence in inflation. Instead of the four rate cuts previously expected, analysts are now forecasting only two for 2025.
“Santa arrived early, bestowing a quarter-point rate drop into the market’s stocking, yet the accompanying note hinted at tougher times ahead with less generous cuts,” remarked Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management in Charlotte, North Carolina.
Prior to this announcement, there was optimism among stock traders that the Fed would aggressively cut rates next year, possibly prolonging the current bull market.
Despite predictions of strong economic growth and a healthier job market in 2025, with rising inflation, the market’s overall response was negative.
“Today’s primary message from the Fed meeting is that inflation concerns are mounting again, and the Fed is visibly worried,” stated Charlie Ripley, Senior Investment Strategist at Allianz Investment Management in Minneapolis, Minnesota.
Some market analysts believe that Wednesday’s sell-off was an overreaction to the Fed’s policies.
“Markets have a tendency to overreact to the Federal Reserve’s policy decisions,” observed Jamie Cox, Managing Partner at Harris Financial Group in Richmond, Virginia. “The Fed’s actions were in line with market expectations—it seems more like a rush to close positions before the holiday break. Fortunately, this 10-day downturn should set the stage for a potential Santa Rally as we move into next week.”
This story has been updated to include new information.
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
