US Stocks Fall as Fed Signals More Cautious Rate Cuts
Summary
US stock prices experienced a significant decline following the Federal Reserve’s announcement of its third consecutive interest rate cut, indicating a slower pace of cuts moving forward.
Interest Rate Change: The Fed lowered the key lending rate to a range of 4.25% to 4.5%, a drop of 1 percentage point since September, amid signs of stabilizing prices and concerns over economic weakening.
Economic Conditions: Recent job creation has proven to be more resilient than expected, while inflation continues to show upward pressure, with a rate of 2.7% in November. Analysts are concerned that incoming policies from president-elect Donald Trump, such as proposed tax cuts and import tariffs, may exacerbate inflation.
Market Reaction: Stock prices fell sharply, with the Dow Jones Industrial Average declining by 2.58%, marking its longest losing streak since 1974. The S&P 500 lost nearly 3%, and the Nasdaq Composite dropped 3.6%. International markets were also impacted, with Japan’s Nikkei 225 down 1.2% and Hong Kong’s Hang Seng index declining by 1.1%.
Fed’s Stance: Chairman Jerome Powell emphasized the need to proceed cautiously in view of inflation and economic signals. He noted, “We are in a new phase of the process” and indicated that future rate cuts may be limited. He acknowledged that although the job market has cooled, there are uncertainties with the transition to a new administration.
Analysts’ Views: Some economists, like Olu Sonola from Fitch Ratings, interpret the Fed’s signal as a possible pause in cuts due to unclear future policies. John Ryding, from Brean Capital, suggested the Fed should have refrained from cutting rates at this time to maintain the progress against inflation.
Global Context: The Fed’s actions come just before the Bank of England announces its interest rate decision, with expectations to hold its rate steady at 4.75%. Concerns about inflation also prevail in the UK, driven by wage growth and service price increases.
Future Projections: The Fed’s forecasts indicate the key lending rate might only fall to 3.9% by the end of 2025, and inflation is anticipated to average around 2.5% next year, remaining above the Fed’s 2% target.