Expectations of interest rate cuts by the Fed were the fatal blow to the markets
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City.
Spencer Platt | Getty Images
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What you need to know today
A cut now, but less ahead
The US Federal Reserve reduced interest rates on Wednesday by 25 basis points, pushing the federal funds rate to a target range of 4.25% to 4.5%. In the Fed’s dot plot, which shows interest rate expectations for the coming years, the central bank has largely indicated only two tariff cuts for 2025less than the four cuts previously forecast in September.
Strong sell-off in the markets
US markets heavily sold out on Wednesday. The Dow Jones Industrial Average lost more than 1,000 points, down 2.58% for the tenth straight day of losses. The S&P 500 decreased by 2.95% and the Nasdaq Composite fell by 3.56%. The pan-European Stoxx 600 – which ended the trade before Fed decision – 0.15% added.
Tesla shares are reversing
Tesla Shares fell 8.3% on Wednesday steepest fall since Donald Trump won the US presidential election in November and the overall market suffered heavy losses. While shares are still up 75% since the Nov. 5 election, the company’s stock appears to be “largely disconnected from fundamentals,” Barclay analysts wrote in a report Wednesday.
Disappointing instructions from Micron
Shares of micron fell more than 15% in extended trading after the company declined Significantly weaker than expected forecastalthough it beat earnings expectations for the most recent quarter. For the current quarter, Micron expects sales of around $7.9 billion. That’s far less than the $8.98 billion expected by analysts, according to LSEG.
(PRO) Why the markets were so disappointed
The stock market suffered a shock after digesting the Fed’s forecast that monetary policy will remain tighter in 2025 than previously forecast. CNBC’s Sarah Min explores why Investors were so disappointedand what market watchers think about the Fed’s decision.
The end result
Wednesday’s dramatic market selloff is a stark reminder that forecasts influence stock moves much more than current circumstances.
The Fed cut its key interest rate by 25 basis points. Borrowing costs will fall and business investment should be boosted, which should lead to job creation and boost growth. This, in turn, theoretically drives stocks higher.
But investors were already confident about the Fed’s rate cut on Wednesday. Before the Fed meeting concluded in December, the futures market suggested a 98 percent chance of a 25 basis point rate cut CME FedWatch tool. This means that investors had already priced the benefits of the rate cut into stocks. In other words, yesterday’s cut would have little impact on stock prices. Investors may have priced in even more optimism than this single rate cut. Just a day ago, investors were betting with an 81.6% probability that the Fed would cut interest rates by another 25 basis points in January.
Fed Chairman Jerome Powell has dashed this hope.
“With today’s action, we have cut our key interest rate by a full percentage point from its peak and our monetary policy stance is now significantly less restrictive,” Powell said his press conference after the meeting. “We can therefore be more cautious when considering further adjustments to our key interest rate.”
The possibility of a 25-point rate cut next month faded to just 6.4%, according to the futures market, after the Fed released its updated dot chart that showed just two rate cuts for 2025.
It is this massive paradigm shift – from the hope that the Fed will go full throttle on rate cuts to the reality that it may even take its foot off the accelerator – that is sending markets into turmoil.
In other words, it’s like waking up on Christmas Day excited to receive a gift, only to realize you’re out of presents. This disappointment wouldn’t happen any other time of year.
As David Russell, global head of market strategy at TradeStation, darkly noted: “Goodbye, punch. No Christmas cheer from the Fed.”
— CNBC’s Daria Mercado, Jeff Cox, Yun Li, Brian Evans and Lisa Kailai Han contributed to this report.
