US markets tumble as Fed signals fewer interest rate cuts in 2025
US markets plunged last night after the Federal Reserve signalled that it would take a more cautious path to interest rate cuts next year.
Following the Fed’s announcement, the Dow Jones fell 2.6 per cent, the S&P 500 fell three per cent, and the Nasdaq fell 3.6 per cent.
This was the biggest decline in US markets since fears of a recession emerged over the summer, and the largest decline for the S&P following a Fed meeting since 2011.
While the Fed did cut rates by 25 basis points last night, the central bank’s summary of economic projections indicated it would only make two rate cuts throughout 2025, down from four in September.
Inflation projections saw a visible upgrade, with the Fed’s preferred gauge of inflation, personal consumption expenditures, expected to average 2.5 per cent in 2025, up from 2.1 per cent.
Most Fed committee members now see the risks to core PCE as tilted to the upside, with one member even voting against the rate cut altogether.
“Aside from the decision itself, just about every other aspect leant in a more hawkish direction than expected,” said Deutsche Bank analysts.
This was followed up by chair Jerome Powell who said in a press conference following the decision that the latest rate cut “was a closer call”, and they were “at a point at which it would be appropriate to slow the pace of rate cuts”.
In particular, Powell emphasised that the central bank needed to see more “progress on inflation” to cut rates further, and was “not going to settle” for inflation staying above two per cent.
“Also, the Fed’s estimate of the neutral rate – where policy is neither restricting nor stimulating the economy – keeps being revised up and we think the policy rate may now be getting close to that point,” noted Jean Boivin, head of the Blackrock Investment Institute.
Following the decision, market odds of the Fed cutting rates in its meeting in January halved, falling to just 8.5 per cent, according to data from CME Group.
Meanwhile, the chance that the Fed does not cut rates at all during 2025 more than doubled to 21 per cent, with a 38 per cent chance of just one 25 basis point cut throughout the year.