U.S. stocks suffered their sharpest daily drop in months on Wednesday, with all three major indexes tumbling after the Federal Reserve delivered a widely expected interest rate cut but signaled a slower pace of easing in 2025, dashing some investors’ hopes for a more aggressive monetary policy pivot.
Market Fallout
The Dow Jones Industrial Average dropped 1,123.03 points, or 2.58%, to close at 42,326.87, its 10th consecutive daily loss—the longest losing streak since October 1974. The S&P 500 slid 2.95%, losing 178.45 points to 5,872.16, while the tech-heavy Nasdaq Composite plunged 3.56%, shedding 716.37 points to 19,392.69.
The small-cap Russell 2000 index posted an even steeper decline, falling 4.4%, its worst day since June 2022. Small-cap stocks, often sensitive to rate changes, struggled despite hopes of benefits from a lower interest rate environment.
Fed Decision and Projections
The Federal Open Market Committee (FOMC) reduced its benchmark interest rate by 25 basis points to a target range of 4.25%-4.5%. While the move was expected, investor sentiment soured as the Fed’s updated Summary of Economic Projections (SEP) pointed to only 50 basis points in rate cuts by the end of 2025, compared with 100 basis points previously forecast.
Chair Jerome Powell struck a cautious tone during his press conference, highlighting solid labor market conditions and persistent inflation as reasons for the tempered pace of rate reductions.
“With today’s action, we’ve lowered our policy rate by a full percentage point from its peak,” Powell said. “We can therefore be more cautious as we consider further adjustments.”
Sector Performance and Broader Impacts
All 11 sectors of the S&P 500 closed in the red, with consumer discretionary stocks dropping 4.7% and real estate shedding 4%. Cryptocurrency-related stocks also suffered steep losses after Powell emphasized that the Fed has no plans to own bitcoin or pursue legislation enabling it.
MicroStrategy (MSTR.O) fell 9.5%, Marathon Digital Holdings (MARA.O) plunged 12.2%, and Riot Platforms (RIOT.O) dropped 14.5%, reflecting broader concerns about regulatory uncertainty.
The CBOE Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” spiked 11.75 points to 27.62, reaching a four-month high.
Treasury Yields and Inflation Concerns
U.S. Treasury yields rose sharply following the Fed’s announcement. The benchmark 10-year note yield climbed to 4.518%, its highest level since May, signaling investor concerns about tighter financial conditions.
Market pricing for future Fed moves shifted, with traders now anticipating 33 basis points of rate cuts in 2025, down from 49 basis points earlier in the day, according to CME Group’s FedWatch tool.
Higher interest rates typically weigh on equity markets by increasing borrowing costs and reducing the appeal of riskier assets.
Investor Sentiment Amid Policy Uncertainty
Despite Wednesday’s sharp declines, the Dow remains up 12.3% year-to-date, while the S&P 500 and Nasdaq have rallied 23% and 29%, respectively. Much of the gains have been driven by enthusiasm for artificial intelligence and hopes for deregulation under President-elect Donald Trump’s incoming administration.
However, concerns over potential inflationary pressures from Trump’s proposed tariffs and fiscal policies have tempered investor optimism.
“We’re in an environment where monetary policy, fiscal policy, and economic fundamentals are all pulling in different directions,” said Alex Hunter, chief investment officer at a major asset management firm.
Declining stocks outnumbered advancers by a ratio of nearly 9.5-to-1 on the NYSE and 5.5-to-1 on the Nasdaq. The S&P 500 recorded six new 52-week highs and 27 new lows, while the Nasdaq reported 80 new highs and 264 new lows.
Trading volume on U.S. exchanges surged to 18.59 billion shares, well above the 20-day average of 14.36 billion, underscoring the intensity of the sell-off.
As markets digest the Fed’s cautious outlook, investors remain wary of the challenges ahead, including elevated inflation and geopolitical uncertainties, setting the stage for heightened volatility in the months to come.