US Stocks Decline as Federal Reserve Signals Cautious Rate Cuts Ahead

US stock markets experienced a significant downturn following the Federal Reserve’s announcement of its third consecutive interest rate cut. The central bank reduced its key lending rate to a target range of 4.25% to 4.5%, marking a one percentage point drop since September. This decision was anticipated, as the Fed cited progress in stabilizing prices and the necessity to prevent potential economic weakening.

In his press conference, Federal Reserve Chairman Jerome Powell indicated that the path ahead for future rate cuts would be more cautious, suggesting that upcoming cuts may be slower than markets had anticipated. He emphasized a careful approach, stating, “We are in a new phase of the process” and expressed the need to monitor inflation developments closely.

As a result, US stock indices dropped sharply, with the Dow Jones Industrial Average falling by 2.58%, marking its longest streak of consecutive declines since 1974. Both the S&P 500 and Nasdaq Composite saw losses of nearly 3% and 3.6%, respectively. Global stock markets felt the impact as well, with declines observed in Asian markets such as Japan’s Nikkei 225 and Hong Kong’s Hang Seng.

The inflation rate in the US climbed to 2.7% in November, reflecting ongoing price pressures, which analysts believe may worsen with incoming policies from president-elect Donald Trump, including proposed tax cuts and import tariffs. Experts have raised concerns that continued rate cuts could exacerbate inflation by encouraging increased borrowing and spending by households and businesses.

Powell defended the latest cut in light of softer job market conditions while acknowledging that it was a “closer call” than in previous instances and recognizing uncertainty surrounding changes in the White House. Many analysts interpreted the Fed’s latest actions as a potential pause in ongoing cuts, prompted by the intersection of economic growth, labor market strength, and emerging inflationary risks.

The forecasts released by the Fed on Wednesday projected a decline in the key lending rate to only 3.9% by 2025—a revision upwards from earlier predictions, while inflation expectations were raised to approximately 2.5%, remaining above the Fed’s target of 2%. John Ryding of Brean Capital suggested that the Fed might have been wiser to forgo the cut, considering the strong economic indicators.

The Fed’s announcement came just before the Bank of England’s anticipated interest rate decision, amidst rising inflation pressures in the UK as well, where rates are expected to stay at 4.75%. Analysts noted that the Bank of England appears to be taking a more measured approach compared to the Fed, as it navigates similar inflationary challenges.