Almost exactly one year after sparking a furious rally in financial markets, Federal Reserve Chair Jerome Powell did the exact opposite on Wednesday, staking out a cautious view on interest-rate cuts in 2025 that stunned investors.
Stocks tumbled 3% and bonds plunged too, sending yields on benchmark 10-year Treasuries to their highest in seven months. By the time Powell was done speaking, some 90 minutes after the Fed announced its third rate cut in a row, the selloff was the worst after a meeting since the onset of the pandemic and the message was clear: The go-go, risk-on rally of the past two-plus years is suddenly in peril.
The turmoil is testament to just how much faith markets were putting in a steady stream of policy easing to buoy asset prices. Now, with officials predicting just a pair of rate cuts over the next 12 months, those hopes have been all but dashed, and investors have been left to pick up the pieces and figure out where to go from here.
“The markets weren’t set up for this Fed announcement,” said Tom di Galoma, head of fixed income at Curvature Securities. “Powell is moving to neutral and waiting for the next administration to push their agenda and see then what he may need to do.”
The last time the S&P 500 Index saw losses of this magnitude on a scheduled Fed decision day was all the way back on Sept. 17, 2001, when the index fell nearly 5%. It plunged 12% on March 16, 2020, a day after the central bank’s emergency weekend meeting during the pandemic.
Treasuries drifted in early US hours Thursday, stock futures bounced after a $1.6 trillion wipeout in the S&P 500’s market capitalization, while the dollar dipped against most major peers, as markets showed some signs of stabilization.
“The market has gone through a repricing exercise,” said John Bilton, head of global multi-asset strategy at JPMorgan Asset Management. “The economic picture looks strong.”
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Of course, Powell’s remarks around a “new phase” of monetary policy during Wednesday’s news conference weren’t a total blindside. Economic data has been hinting at a resilient US economy, while inflation has remained stubbornly above the Fed’s 2% target. In the $29 trillion US bond market, traders had pushed yields up some 75 basis points on the 10-year Treasury since the central bank first started cutting rates in mid-September.
Still, they were caught off guard by how close officials appear to be to the end of their cutting cycle.
The swaps market now implies fewer than two quarter-point reductions for the entirety of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday. In the options market linked to the Secured Overnight Financing Rate, one large block trade placed Wednesday afternoon even stands to benefit from the start of another hiking cycle next year.
“It sounds like the Fed is going to take a very conservative pathway forward,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co. “Inflation has proven more resilient than they had thought and impending political dynamics have increased the near-term forecasting difficulties.”
Of course, both the Fed and the markets’ outlooks have to be taken with an element of flexibility. President-elect Donald Trump, who will re-enter the White House in little over a month, has vowed to ramp up tariffs on top US trading partners and slash taxes — both policies that economists say have the potential to stoke inflation.
“The bar for more cuts is significantly higher than maybe some suspected,” said Tom Graff, head of investments at Facet Wealth, a Baltimore-based money manager that oversees about $1.5 billion. “It’s going to take time for the Fed to regain confidence that inflation is indeed falling, and President Trump’s policies will add to inflation uncertainty.”
Powell Pivot 2.0
Elsewhere in markets on Wednesday, the Bloomberg Dollar Spot Index surged to its highest since 2022, while the euro, pound and Swiss franc all plunged by at least 1%. The offshore Chinese yuan also fell to the lowest level since 2023.
Wall Street’s riskiest corners, which soared as the Fed cut rates earlier this year and bulls speculated Trump would stoke growth, were also hammered. Goldman Sachs Group Inc.’s gauge of most-shorted stocks fell 4.9%, its worst session since February, while a basket tracking profitless tech fell 6.4%, the most in two years. Tesla dropped 8.3% and Bitcoin, which was nearing $108,000, fell 5%.
“As is typically the case when you see really frothy sentiment, a negative catalyst needs to come along to tip the market over, and that was the hawkish tone,” said Kevin Gordon, senior investment strategist at Charles Schwab & Co. “The speculative pockets of the market were at the ‘scene of the crime’ when sentiment was getting stretched, so it’s not a surprise to see them taking it on the chin.”
Volatility spiked, with the Cboe’s VIX surging past 28, the highest since August’s bout of turbulence. The cost for options protection on the S&P 500 surged. VIX call volume outpaced puts by 2 to 1 and the VVIX — which measures the implied volatility of VIX options, also reached the highest since early August.
Bank stocks also tumbled. The KBW Bank Index fell 4.3% as Wall Street’s six mega banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., were each down at least 3%.
“The stock market got way over its skis ahead of this meeting, and this is a good way to shake some people out before the holidays,” said Jamie Cox, managing partner at Harris Financial Group.
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