U.S. stocks faced a significant decline, experiencing one of their worst days in 2024, as the Federal Reserve hinted at a less aggressive approach to rate cuts moving into 2025. The S&P 500 dropped by 2.9%, the Dow Jones Industrial Average fell by 1,123 points (2.6%), and the Nasdaq composite decreased by 3.6%.
On Wednesday, the Federal Reserve reduced its main interest rate for the third time this year, marking a shift that began in September when rates were lowered from a two-decade high. While Wall Street typically welcomes lower rates as they foster borrowing and investment, this particular cut was largely anticipated. The crucial consideration now lies in the Fed’s future rate-cutting strategy. Projections indicate a median expectation among Fed officials for only two additional cuts in 2025, a steep decline from the previously expected four cuts.
Fed Chair Jerome Powell emphasized the shift in approach, citing the strong job market and rising inflation rates as factors prompting caution. The uncertainty surrounding the upcoming presidential administration has also contributed to a more conservative strategy. Higher interest rates can stimulate economic growth but may also exacerbate inflation. To illustrate the cautious stance, Powell likened it to navigating a foggy road, suggesting that a slower pace is warranted when conditions are uncertain.
Responding to the Fed’s news, Treasury yields surged, further pressuring the stock market. The yield on the 10-year Treasury rose to 4.51%, while the two-year yield climbed to 4.35%. This shift had a pronounced impact on stocks, particularly those of smaller companies reliant on borrowing.
While many stocks suffered losses, some companies managed to perform well. Jabil experienced a boost of 7.3% after reporting better-than-expected profits and raising its revenue forecast for the fiscal year. Conversely, shares of General Mills fell 3.1% despite reporting stronger profits, as the company plans to increase investments which led to a lowered profit outlook for the fiscal year.
In international markets, London’s FTSE 100 saw a slight increase, while Japan’s Nikkei 225 dropped by 0.7%, despite a significant rise in Nissan Motor Corp.’s stock due to merger discussions with Honda.
In summary, the stock market’s downturn reflects investor concerns about potential shifts in monetary policy from the Federal Reserve, which may impact economic growth and inflation. However, the resilience of certain companies demonstrates opportunities that still exist, even amid broader market challenges. As the economy navigates these uncertainties, a careful approach can foster stability and growth moving forward.