Fed slashes rates but signals slower pace of cuts in 2025 — Dow plunges more than 1,100 points

The Federal Reserve slashed interest rates as expected Wednesday, but signaled fewer cuts than originally forecast for 2025 — sending the Dow spiraling more than 1,100 points. 

The Fed cut rates by 25 basis points to the 4.25%-4.50% range and its summary of economic projections (SEP) indicated it will make rate cuts totaling a half percentage point by the end of 2025 given the solid labor market and the recent stall in lowering inflation.

Policymakers had previously hinted at possibly four rates cuts for next year.

Fed Chair Jerome Powell said policymakers want to see more progress on bringing inflation down as they consider the path of future rate cuts, as inflation has exceeded year-end projections.

Inflation currently stands at 2.7%, above the Fed’s target of 2%.

“As we think about further cuts, we’re going to be looking for progress on inflation. We have been moving sideways on 12-month inflation” Powell told a news conference after the two-day meeting.

“As we go forward, we’re going to want to be seeing further progress on bringing inflation down, and keeping a solid labor market.”

Powell’s comments led to a rout in the markets, with the Dow Jones Industrial Average plunging 1,123.03, or 2.6%, to close at 42,326.87. It was the 10th straight day the blue-chip index had finished in the red, the worst skid since 1974.

The S&P 500 lost 178.45 points, or 2.95%, to end at 5,872.16, while the Nasdaq Composite nosedived 716.37 points, or 3.56%, to 19,392.69.

Santa came early and dropped a 25-bps rate cut in the markets stocking, but accompanied it with a note saying there would be coal next year, Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in a note.

Powell said it has been a bit frustrating that inflation is taking longer to cool than policymakers expected but he added the economy has performed better on unemployment and inflation than many people would have expected just a few years ago.

“If you look at the changes to the statement of economic projection, they really had no choice,” said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts.

“So as you look at all the changes that they made, it’s very clear that the economy is running a lot hotter than their previous projection. And that has got to contribute to their desire to potentially pause.”

In September, the Fed issued an outsize, half-point interest rate cut its first cut since 2020 on greater confidence that inflation was calming toward the banks 2% goal and that a weak job market posed a greater risk.

The Fed removed its language about greater confidence and cut rates again in November by a quarter point.

The third cut comes amid a mixed bag of economic data.

Though inflation appeared to be cooling, the Consumer Price Index showed inflation rose 2.7% in November heating up for the second month in a row and above the 2.6% seen in October, according to the Labor Department.

Consumer spending remained relatively unharmed. Retail sales jumped 0.7% in the same month, beating forecasts of 0.6%, and Octobers retail sales figure was revised up to 0.5% from 0.4%, according to the Census Bureau.

However, an unsteady labor market has raised some cause for concern as President-elect Donald Trump has called for the Fed to lower rates at a quicker pace.

Hiring rates and job openings have declined this year, and job growth in crucial sectors like manufacturing, business and professional services has tapered off to a standstill. 

“It looks like some early worries about tariffs could be creeping into the Feds projections. Theyre penciling in fewer rate cuts in 2025, slightly higher inflation, and a modest increase in the unemployment rate,” said Brian Jacobsen, Chief Economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

“The Fed can cut back on the pace of rate cuts thanks to a strong economy.”

With Post wires