Market Reaction to Fed's Rate Cut and Future Outlook

In a significant move reflecting current economic conditions, U.S. share prices experienced a notable decline following the Federal Reserve’s announcement of a third consecutive interest rate cut, bringing the key lending rate to a target range of 4.25% to 4.5%. While this cut was anticipated, the Fed’s projections indicated that the pace of future rate reductions would slow, eliciting a negative response from the stock market. Fed Chairman Jerome Powell emphasized a cautious approach moving forward, expressing a need to monitor inflation closely.

The Dow Jones Industrial Average recorded a sharp 2.58% drop, marking its longest losing streak since 1974, while the S&P 500 and Nasdaq Composite fell by 3% and 3.6%, respectively. Global markets also reflected this downturn, with Japan’s Nikkei 225 and Hong Kong’s Hang Seng both registering slight declines in the following trading session.

Despite the Fed’s rationale for the rate cuts, citing progress in stabilizing prices and an effort to prevent economic weakening, persistent inflation remains a concern, having risen to 2.7% in November. Analysts warn that potential economic policies from President-elect Donald Trump, such as tax reductions and increased tariffs, could further exacerbate inflationary pressures. The Fed’s decision to lower borrowing costs, while aimed at stimulating spending, might inadvertently contribute to higher prices by increasing demand.

Powell acknowledged the challenges faced ahead, indicating that the decision to cut rates was difficult and that economic uncertainties loomed large with the upcoming transition in the White House. Analysts have noted that while the job market remains robust, inflation may pose a growing threat. For instance, Olu Sonola from Fitch Ratings commented that the Fed appears to be signaling a pause in rate cuts as uncertainties surround potential future policies.

The recent rate cut was notably opposed by one Fed policymaker and may complicate the economic landscape as Trump’s administration takes office. Market predictions suggest mortgage rates could rise in response to the Fed’s actions, contradicting Trump’s promises to lower borrowing costs. Projections have shifted, with the Fed now forecasting a future key lending rate of 3.9% by the end of 2025, up from previously estimated figures.

Following the Fed’s announcement, the Bank of England is also expected to address similar inflation concerns, with predictions indicating it will maintain its current benchmark rate of 4.75%. Experts point to wage growth and service price inflation in the UK potentially compelling the Bank to act more conservatively than the Fed. In light of these developments, economists are calling for a more prudent approach in managing inflation amidst ongoing economic recovery.