Stocks dive after Fed inflation forecasts

Major stock indexes plunged on Wednesday after the Federal Reserve signaled a slower pace of rate cuts for 2025 than previously forecast, renewing concerns about how quickly inflation would fall.

The S&P 500 lost 2.4% and Nasdaq Composite down 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 straight day of decline is now inching closer to becoming its worst losing streak in 50 years. While conspicuous, the streak largely reflects a rotation by investors from more established companies to technology stocks, which the Dow tends to place less weight on.

The Fed indicated it now sees just two cuts in its key federal funds rate next year, after projecting four a few months ago. This is because the central bank now believes that inflation will continue to remain above its target of 2% into 2026.

In other words, the Fed is signaling that interest rates will need to stay higher for longer to keep a lid on the pace of price increases.

That’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. In addition to its higher inflation projections, the Fed also indicated that the unemployment rate is unlikely to move much beyond the current level of 4.2%, suggesting that the labor market will remain relatively stable.

“The Fed appears to be more comfortable with the trajectory of the US economy than it was a few months ago, telling us that inflation concerns are back in play for the Fed,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, in a comment that was sent via email. to customers on Wednesday.

The wild card remains Donald Trump. The president-elect has promised to implement a wide range of tariffs that economists say will likely mean price increases. Trump himself stated in an interview with NBC News that he could not guarantee that consumers would not end up paying more once they are implemented.

Trump has offered a variety of justifications for imposing the duties — from job creation to revenue generation to national security concerns — without providing a clear picture of how they would ultimately affect the economy over the long term.

Questions also remain about what the US fiscal picture will look like during Trump’s second term. While he has promised to cut spending to unprecedented levels, he has also promised to cut taxes, something that will stimulate growth but potentially increase the current deficit.

For economists and monetary policymakers, it’s an uncertain brew, but one that indicates the economy is likely to continue to warm.

“The economic and inflationary backdrop is not one that screams a need for meaningful policy stimulus, while the incoming administration could give them a serious inflation headache next year,” Seema Shah, global chief strategist at Principal Asset Management, said in an emailed comment Wednesday.