Stocks tumble after Fed cuts rates, signals slower cut pace

By Chuck Mikolajczak

NEW YORK (Reuters) -U.S. stocks plunged on Wednesday, erasing earlier gains after the Federal Reserve cut interest rates by a quarter of a percentage point and the central bank’s economic projections signaled a slower pace of cuts next year.

The Fed cut rates by 25 basis points to the 4.25%-4.50% range and its summary of economic projections (SEP) indicated it will make rate cuts totaling a half percentage point by the end of 2025 given the solid labor market and the recent stall in lowering inflation.

“If you look at the changes to the statement of economic projection, they really had no choice,” said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts.

“So as you look at all the changes that they made, it’s very clear that the economy is running a lot hotter than their previous projection. And that has got to contribute to their desire to potentially pause.”

According to preliminary data, the S&P 500 lost 181.39 points, or 2.96%, to end at 5,869.22 points, while the Nasdaq Composite lost 728.19 points, or 3.62%, to 19,380.87. The Dow Jones Industrial Average fell 1,135.57 points, or 2.61%, to 42,300.04.

The Dow suffered its 10th straight session of declines, to mark its longest daily streak of losses since an 11 session skid in October 1974.

Despite the recent declines, the Dow is up nearly 15% on the year, while the S&P has rallied about 26% and the Nasdaq has shot up almost 33%, lifted in large part by technology companies and enthusiasm around artificial intelligence, along with the prospects of a lower rate environment and more recently, the hope of deregulation policies from President-elect Donald Trump’s incoming administration.

However, investors are also wary that some of Trump’s expected policies, such as tariffs, could rekindle higher inflation.

The Cboe Volatility Index – an options-based gauge of investor expectations for near-term stock market gyrations – jumped as much as 8.0 points to a four-month high of 23.87.

U.S. Treasury yields moved higher after the statement as the benchmark U.S. 10-year note reached its highest level since May 31 at 4.51%.

“You’ve got the 10-year creeping back up, around that 4.5% and particularly the 5% level that’s been a real problem for equity markets,” said Ross Mayfield, investment strategist at Baird in Louisville, Kentucky.

“Probably the most obvious headwind or point of contention for markets in the first quarter of next year is whether the markets interpret the policies on the table as inflationary and, or, pro-growth, both things are embedded in the 10-year.”

Higher interest rates are usually seen as a drag to the equity market, boosting the appeal of less risky assets while crimping the ability of companies to grow earnings.

Each of the 11 major sectors were lower, with real estate and consumer discretionary leading declines.

Cryptocurrency related stocks fell, with losses accelerating after Powell said the central bank is not allowed to own bitcoin and is not seeking a law change in order to do so. There has been speculation Trump’s incoming administration might seek to build a government owned stock of the asset. Miscrostrategy, MARA Holdings and Riot Platforms (NASDAQ:) each closed lower on the session.