US stocks fall sharply, Dow falls 1,100 points after Fed hints at just 2 rate cuts for 2025

On December 19, 2024By Littum

NEW YORK (AP) — U.S. stocks fell for one of their worst days of the year after the Federal Reserve on Wednesday hinted that can give fewer shots of adrenaline for the US economy in 2025 than previously assumed.

The S&P 500 fell 2.9%, just shy of its biggest loss of the year, to pull back further from its all-time high set a few weeks ago. The Dow Jones Industrial Average lost 1,123 points, or 2.6%, and the Nasdaq fell 3.6%.

The Fed said on Wednesday it is cutting interest rates for the third time this year, continuing the sharp turnaround that began in September when it started. lower rates from a two-decade high to support the labor market. Wall Street loves easier interest rates, but that cut was already widely expected.

The bigger question is how much more the Fed will cut next year. Much is riding on it, especially after expectations of a series of cuts in 2025 helped the US stock market set a record 57 times so far in 2024.

Fed officials released projections on Wednesday showing the median expectation among them is for two more cuts in the federal funds rate in 2025, or half a percentage point worth. That’s lower than the four cuts expected just three months ago.

“We are in a new phase of the process,” Fed Chairman Jerome Powell said. The central bank has already quickly cut its prime rate by a full percentage point to a range of 4.25% to 4.50% since September.

Asked why Fed officials are looking to slow their cuts, Powell pointed to how the labor market appears to be doing well overall and how recently inflation the readings are taken. He also cited uncertainties that will require policymakers to respond to upcoming changes in the economy to be determined.

While lower interest rates can spill over into the economy by making it cheaper to borrow and increasing the prices of investments, they can also offer more fuel for inflation.

Powell said some Fed officials, but not all, are also already trying to incorporate uncertainties associated with a new administration entering the White House. Concerns are rising on Wall Street President-elect Donald Trump preference for tariffs and other policies can increase inflation along with economic growth.

“When the trail is uncertain, you slow down a little bit,” Powell said. It’s “not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

One official, Cleveland Fed President Beth Hammack, thought the central bank should not have even cut rates this time. She was the only vote against Wednesday’s rate cut.

The reduced expectations for interest rate cuts in 2025 caused government bond yields to rise in the bond market and pressured the stock market.

The yield on the 10-year Treasury note rose to 4.51% from 4.40% late Tuesday, a notable move for the bond market. The two-year interest rate, which more closely follows expectations for the Fed’s action, rose to 4.35% from 4.25%.

On Wall Street, shares of companies that may feel the most pressure from higher interest rates fell to some of the worst losses.

Shares in smaller companies fared, for example. particularly bad. Many need to borrow to fuel their growth, which means they may feel more pain when paying higher interest rates on loans. The Russell 2000 index of small-cap stocks fell 4.4%.

Elsewhere on Wall Street, General Mills fell 3.1% despite reporting a stronger-than-expected profit for the latest quarter. The maker of Progresso soups and Cheerios said it will increase its investment in brands to help them grow, prompting it to cut its forecast for profit this financial year.

Nvidia, the superstar stock responsible for part of Wall Street’s rally to records in recent years, fell 1.1% to extend its weeklong funk. It’s down more than 13% from its record high last month and has fallen for nine of the past 10 days as its big momentum fades.

On the winning end of Wall Street, Jabil jumped 7.3% to help lead the market after reporting stronger profit and revenue for the latest quarter than analysts expected. The electronics company also raised its full-year revenue forecast.

Overall, the S&P 500 fell 178.45 points to 5,872.16. The Dow Jones Industrial Average fell 1,123.03 to 42,326.87 and the Nasdaq Composite slipped 716.37 to 19,392.69.

In stock markets abroad, London’s FTSE 100 rose less than 0.1%, data showed inflation accelerated to 2.6% in November, the highest level in eight months. The Bank of England is also meeting on interest rates this week and will announce its decision on Thursday.

In Japan, where the Bank of Japan will wrap up its own policy meeting on Friday, the Nikkei 225 fell 0.7 percent. This was despite a jump of 23.7% Nissan Motor Corp., which said it was in talks to work more closely with Honda Motor Co., although no decision had been made on a possible merger. Honda Motor’s share lost 3 percent.

Nissan, Honda and Nissan alliance member Mitsubishi Motors Corp. agreed in August to share electric vehicle components such as batteries and to jointly research autonomous driving software to better adapt to dramatic changes in the automotive industry.

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AP writer Zimo Zhong contributed.