On December 18, 2024, the Federal Reserve announced a 0.25% interest rate cut, bringing the federal funds rate to a range of 4.25% to 4.5%. This marks the Fed’s third rate reduction this year, aiming to support the economy while inflation remains above the 2% target.
Market reaction
The announcement triggered a significant market response:
- The Dow Jones Industrial Average dropped over 1,100 points, marking its 10th consecutive day of losses—the longest streak since 1974.
- The S&P 500 and Nasdaq Composite also tumbled, with declines of 2.9% and 3.6%, respectively.
- Bond yields rose, with the 10-year Treasury note hitting its highest level since May, and the dollar strengthened.
Why the sell-off?
While the rate cut was widely expected, the Fed’s cautious outlook for 2025 caught investors off guard. The central bank signaled just two additional cuts next year, slower than markets had hoped. This tempered approach led to a reassessment of valuations and heightened concerns about future economic growth.
What’s next?
Fed Chair Jerome Powell emphasized the need for further progress in reducing inflation before committing to more aggressive rate cuts. “We need to see more progress in lowering inflation before we can be confident that the job is done,” Powell said.
As the Fed navigates its delicate balancing act, traders and investors should brace for continued volatility in the months ahead. The evolving interplay between inflation, economic data, and monetary policy will remain a focal point for the markets.
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