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Market Plunge Following Fed Announcement
U.S. stocks experienced one of their worst declines of 2024 after the Federal Reserve signaled fewer interest rate cuts than investors anticipated for next year. The S&P 500 plummeted 2.9%, just shy of its biggest annual drop, while the Dow Jones Industrial Average plunged 1,123 points (2.6%) and the tech-heavy Nasdaq composite sank 3.6%.
Fed's Surprising Guidance
While the Fed cut rates by a quarter percentage point as expected - its third reduction this year - officials revealed projections showing a median expectation of just two additional cuts in 2025. This represents a significant reduction from the four cuts forecasted three months ago, bringing the federal funds rate down to a projected range of 4.25% to 4.50% by year-end 2025.
Fed Chair Jerome Powell explained the cautious approach: "When the path is uncertain, you go a little slower. It's not unlike driving on a foggy night or walking into a dark room full of furniture." Powell cited persistent inflation concerns, a strong job market, and political uncertainties surrounding the incoming Trump administration as key reasons for the reduced easing pace.
Market Reactions and Sector Impact
The announcement triggered immediate reactions across financial markets:
- Treasury yields surged, with the 10-year note jumping to 4.50%
- Small-cap stocks (Russell 2000) tumbled 4.4% as higher rates threaten growth-dependent companies
- Tech giant Nvidia extended its recent slump, falling another 1.1%
Cleveland Fed President Beth Hammack notably dissented, opposing even Wednesday's rate cut - highlighting internal divisions about monetary policy direction.
Investor Portfolio Shifts
Financial advisors reported clients rapidly adjusting allocations. "We're seeing rotation into value stocks and dividend payers," said Merrill Lynch strategist Rebecca Tan. "The 'higher for longer' rate narrative changes risk calculus, especially for growth stocks."
Market analysts noted that expectations of deeper 2025 rate cuts had fueled much of this year's record-setting rally, with the S&P 500 notching 57 all-time highs in 2024. The Fed's updated projections now force investors to reconsider earnings valuations across multiple sectors.
As the market digests the Fed's guidance, volatility is expected to persist through year-end. Investors await upcoming inflation data and the central bank's January meeting for clearer signals about the 2025 monetary policy path.
