Major stock indices plunged Wednesday after the Federal Reserve signaled a slower pace of interest rate cuts for 2025 than previously forecast, renewing concerns about how fast inflation would fall.
The S&P 500 lost 2.4% and the Nasdaq Composite shed nearly 3%, with losses intensifying as markets closed for the day.
The Dow Jones Industrial Average tumbled more than 1,100 points for its biggest loss since August. The Dow’s 10th-consecutive day of decline is now closer to becoming the worst losing streak in 50 years. Though eye-popping, the streak largely reflects a rotation by investors out of more established companies into tech stocks, to which the Dow tends to apply less weight.
The Fed indicated it now sees just two reductions to its key federal funds rate next year, after projecting four a few months ago. It comes as the central bank now believes inflation will continue to remain above its 2% target into 2026.
In other words, the Fed is signaling that interest rates will have to remain higher for longer to keep a lid on the pace of price increases.
It’s bad news for stocks — whose growth tends to get a boost from lower interest rates — but a more mixed picture for the broader economy. Alongside its higher inflation projections, the Fed also indicated the unemployment rate is unlikely to move much beyond its current level of 4.2%, suggesting the labor market will remain relatively stable.
“The Fed appears more comfortable with the trajectory of the U.S. economy relative to a few months ago and tells us the concerns around inflation are back in play for the Fed,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in commentary emailed to clients Wednesday.
The wild card remains Donald Trump. The President-elect has promised to implement a broad range of tariffs that economists say will likely mean price increases. Trump himself indicated in an interview with NBC News that he couldn’t guarantee consumers wouldn’t end up paying more once they are implemented.
Trump has offered a number of different rationales for imposing the duties — from job creation to revenue raising to national security concerns — without giving a clear picture of how they would ultimately impact the economy in the long run.
Questions also remain about how the U.S. fiscal picture will look like under Trump’s second term. While he has vowed to slash spending at unprecedented levels, he has also promised to cut taxes, something that would stimulate growth but potentially add to the current deficit.
For economists and monetary policymakers, it’s an uncertain brew, but one that indicates the economy is likely to continue to run hotter.
“The economic and inflation backdrop is not one that screams a need for meaningful policy stimulus, while the incoming administration may give them a severe inflation headache next year,” Seema Shah, chief global strategist at Principal Asset Management said in emailed commentary Wednesday.
