(Bloomberg) — The Federal Reserve shocked U.S. markets on Wednesday, sending stock prices tumbling and Treasury yields soaring, after predicting fewer interest rate cuts next year. It was the biggest loss for the S&P 500 on the day of a rate decision since 2001.
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The S&P 500 fell below the 6,000 point level, experiencing its worst session since August. The tech-heavy Nasdaq 100 fell 3.6%, the most in five months. Micron Technology Inc. fell postmarket after reporting earnings.
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The policy-sensitive two-year U.S. Treasury yield rose 10 basis points to 4.35% and the 10-year yield rose to levels last seen in May. Bloomberg’s gauge for the dollar has risen to its highest level since November 2022.
While Jerome Powell delivered a widely expected quarter-point rate cut after a meeting of the Federal Open Market Committee, the central bank signaled increasing caution on inflation, including a reduction in the extent to which members expect easing in 2025 will go. Powell again emphasized that the central bank would be more cautious as it considers further policy rate adjustments and said the Fed is committed to reaching its 2% target.
“We need to see progress on inflation,” Powell said. “That’s how we think about it. It’s kind of a new thing. We moved fast to get here, but as we move forward, we move slower.”
The speed of Wednesday’s decline matched the speed with which the Fed returned to an inflation-mistrustful stance. Before the latest session, the S&P 500 had risen more than 10% since the FOMC’s July 31 interest rate decision, with the central bank abandoning its biased risk assessment and saying maintaining labor market expansion had become a bigger priority.
In Wednesday’s briefing, the chairman also said some policymakers have begun to factor into their forecasts the potential impact of higher tariffs that newly elected President Donald Trump could implement. But he said the impact of such policy proposals is highly uncertain at this point.
Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, called Powell “a hawk in pigeon clothing.”
“Despite downplaying the recent slowdown in disinflation while boasting about the strength of economic momentum, he still hinted that rates will not be written off as temporary and that the two-cut forecast for 2025 is necessary because it policy must remain restrictive,” he says. said.
The last time the S&P 500 experienced losses of this magnitude on Fed decision day was September 17, 2001, when the index fell nearly 5%. On March 16, 2020, rates fell 12%, one day after the Federal Reserve’s emergency weekend meeting amid the pandemic.
