The Federal Reserve's latest interest rate decision turned the financial markets upside down, delivering Wall Street its worst trading day of the autumn. On December 18, 2024, the central bank announced it was lowering the target interest rate by 0.25 percentage points, bringing it down to the range of 4.25%-4.50%. While many analysts had anticipated this move, the ensuing forecasts suggested there would be fewer cuts than previously expected, spooking investors.
By the markets' close, all major indices reflected the negative sentiment: the S&P 500 plummeted by 3.0%, Nasdaq dropped 3.6%, and the Dow Jones retreated by 2.6%. According to CNBC, this marked the tenth consecutive trading day of declines for the Dow, which is the longest losing streak since 1974.
“It was no holiday cheer from the Fed. The members forecast higher inflation and lower unemployment for 2024,” noted David Russell, strategy expert at TradeStation, who suggested the Fed could no longer afford to remain dovish under the current economic outlook.
Even before the Fed's decision, market participants were cautious. The reaction upon the announcement was immediate: initial gains dissipated, accompanied by widespread declines across the exchange floors. Notably, the Nasdaq had its roughest day, down nearly 3.6%, especially impacted by the tech giants, commonly referred to as the "Magnificent Seven." Tesla was among the hardest-hit, seeing its stock fall 9%, with Broadcom not far behind, down 8%.
The fallout was substantial across other tech firms too, including Alphabet, Amazon, and Meta, all of which ended the day significantly lower. This was symptomatic of investor reaction to the Fed's lack of clarity on the future path of interest rates.
Estimates about the Fed's direction had shifted considerably over the autumn. SEB’s U.S. economist Elisabeth Kopelman highlighted these shifts: “The outlook is different than it was back in September when they initiated their rate cuts.” With this latest decision, projections for the 2025 rate cuts shifted to reflect fewer anticipated decreases.
The significance of inflation also dominated discussions post-announcement. Inflation had been on the decline earlier, but recent trends showed only slowed rates rather than the expected downturn. November’s Consumer Price Index showed inflation at 2.7% compared to the previous year, something Kopelman refers to as “frustration for the Fed.” She indicated, “All of this suggests they will adjust their rate path upwards until they can form a clearer picture of where the economy is truly headed.”
Through all of this, potential disruptions loomed on the horizon with the anticipated inauguration of Donald Trump, who is poised to return to the presidency. Discussions around his economic policies, including tariff implementations and deportations, have added to the uncertainty characterizing markets. High-profile economists warn of potential significant impacts on growth, as Morgan Stanley's Seth Carpenter cautioned about a potential drop-off due to these policies.
Kopelman addressed these concerns, stating, “The biggest threat to growth and inflation is the talk of mass deportations,” adding to the unease already present among investors. Speculations over who would replace current Fed chairman Jerome Powell have also surfaced since Trump's return to power could reshape the board and the central bank's approach to economic regulation.
This turbulent backdrop has raised questions not just about the Fed's current strategy, but also about the broader economic path going forward. With various factors—shifting inflation rates and labor market conditions—weighing heavily on investors' minds, maintaining stability has become increasingly complex.
Whether the Fed will enact the expected cuts as they attempt to navigate these tumultuous waters remains to be seen. “There are risks on both sides, and we are trying to find the appropriate path between them,” Powell noted during his post-decision press conference, emphasizing the delicate balance the Fed must strike.
Overall, the financial markets have expressed their discontent with Federal Reserve chair Jerome Powell's most recent interest rate moves, reflecting the challenging economic conditions and the uncertain horizon for both the policymakers and market participants alike.
With heightened volatility forecasted for the upcoming months, investors are certainly advised to brace for more turbulence as the overarching economic narrative continues to evolve.
