Global stock markets reacted sharply to the Federal Reserve's latest decision to cut interest rates, with Asian shares dropping on December 19, 2024, following Wall Street's significant sell-off the previous day. The Fed cut its key interest rate by 25 basis points, bringing it to between 4.25% and 4.5%, but indicated fewer cuts than expected for the upcoming year.
According to the Associated Press, Wednesday marked one of the worst trading days of the year on Wall Street, with the Dow Jones Industrial Average falling over 1,100 points or 2.6%. Other indices also suffered; the S&P 500 dropped 3% and the tech-heavy Nasdaq composite fell 3.6%. The S&P 500 is now below its 50-day moving average.
The Fed's announcement reflected its shift to projecting only two rate cuts for 2025, down from four as anticipated previously. This change has sparked concern among investors and analysts alike, particularly about the health of the economy and rising inflation rates. Fed Chair Jerome Powell highlighted the cautious approach, stating, 'When the path is uncertain, you go a little slower'—an analogy he drew to 'driving on a foggy night.'
This new directive from the Fed has resulted in considerable volatility, particularly affecting sectors sensitive to interest rate changes. Notably, the S&P 500 Consumer Discretionary Sector Index plunged 4.6%, driven by significant losses at major corporations like Tesla, which fell 8.3%, and Amazon, down 4.6%. Similarly, the S&P 500 Real Estate Sector Index dropped 4%, indicating broader market unrest.
Current market dynamics have also adversely affected smaller companies, as seen with the Russell 2000 index, which fell by 4.1%, reaching its lowest close in six weeks. These smaller firms often rely heavily on borrowing, making them particularly vulnerable to fluctuated interest rates.
Meanwhile, economist Jack McIntyre from Brandywine Global characterized the Fed's latest actions as 'hawkish.' He noted the combination of projected stronger economic growth and higher anticipated inflation as reasons for the reduced number of expected rate cuts.
Adding to the uncertainty is the incoming administration of President-elect Donald Trump, whose policies are expected to impact both trade tariffs and inflation. Analysts are waiting to see how his economic approach will sway the Fed's monitoring of rates, especially with rising inflation being a significant factor to watch moving forward.
The Fed's signals have elevated Treasury yields, particularly with the yield on the 10-year Treasury note rising to 4.51% from 4.40%. Higher yields typically increase borrowing costs and can exert downward pressure on stock valuations, contributing to the sell-offs experienced across major markets.
Despite these challenges, some sectors showed resilience. For example, tech giant Jabil recorded intraday gains as it raised its fiscal 2025 earnings outlook following strong quarterly results. This highlights the dichotomy within the market, where certain companies can still thrive even amid general volatility.
Looking globally, Asian markets reflected similar anxiety. The Tokyo Nikkei 225 index experienced only minor losses, falling 0.7%, whereas major declines were noted across Chinese indices, with the Hang Seng losing 1% and the Shanghai Composite dropping 0.7%.
These market shifts are generating ripples beyond the U.S., with the Bank of Japan maintaining its benchmark rate at 0.25%, keeping investors on alert for potential future moves. Insistent pressure remains on the Bank of Japan to reconsider its policy pathway, especially with the U.S. Federal Reserve's actions influencing the economic backdrop.
Overall, as analysts assess the potential for rate cuts and their anticipated impacts, there is clear anxiety about managing inflation alongside economic growth heading toward 2025. With both domestic and international economic factors at play, market participants are bracing for considerable uncertainty.
