On Wednesday evening, Federal Reserve Chair Jerome Powell took the markets by surprise. The Fed decided to lower its benchmark interest rate to a range between 4.25% and 4.5%. This decision marks a 100-basis-point decline since mid-September.
Wall Street typically greets rate cuts with enthusiasm as they reduce borrowing costs, fueling spending, investment, and hiring. These cuts also suggest that inflation is under control, making stocks more appealing compared to safer assets like Treasurys. However, the markets reacted unexpectedly this time. The Fed’s forecast of just two rate cuts for next year, instead of the anticipated four, sent stocks plummeting.
The immediate aftermath saw the S&P 500 and Dow Jones indices slide nearly 3%, while the Nasdaq 100 fell almost 4%. This substantial dip triggered a dramatic 74% surge in the VIX, often referred to as the stock market’s fear gauge, marking its second-largest one-day jump in history. While some experts recommend caution with fewer expected rate cuts in 2025, many analysts on Wall Street view the sell-off as an opportunity to “buy the dip,” predicting it won’t disrupt this year’s expected “Santa Claus” rally.
After Wednesday’s turbulent market session, here’s what investors and analysts are discussing. Some investors seem to have overreacted. They should have expected the Fed to hint at a slowdown in rate cuts, according to Schleif. She emphasized that the economy’s continued strength is the key point. “Markets appeared to overlook the numerous occasions Chair Powell emphasized the robust economy,” she explained. “The Fed’s slower pace in rate cuts reflects a strong economy, which is ultimately the most critical factor for stocks and earnings.”
Citi economists predict the Fed’s current hawkish stance won’t last. They anticipate a shift towards a more dovish approach once the labor market shows signs of weakness. With only 50 basis points of cuts anticipated from now until mid-2026, Hollenhorst is skeptical. “As the labor market weakens further in the coming months, I expect the Fed will cut rates faster than the market currently anticipates,” he noted. “We foresee a significant dovish shift from Powell and the committee soon.”
Ives argues that the Fed’s rate trajectory won’t be the main driver for tech stocks over the upcoming years. “Ultimately, this isn’t the deciding factor for a soft landing or a bullish environment for risky assets,” he stated in a client note. Instead, he advises focusing on the two major catalysts for tech: AI development and a regulatory environment conducive to mergers and acquisitions.
The market’s seemingly extreme reaction to the Fed’s announcement suggests that Wall Street might be engaging in some healthy profit-taking after enjoying a fantastic run since the U.S. election. Investors should see this as a temporary pause rather than the end of the celebration.
Some have critiqued the Fed’s reactive stance, noting that even with impactful decisions, its approach still affects the economy with considerable delays. With commentary and forecast changes indicating dramatic shifts, it’s no wonder investors feel unease about future decisions. “We had a year-end inflation forecast, and it’s kind of fallen apart,” Powell admitted, illustrating the uncertainty gripping the central bank. Now, both markets and the Fed are left guessing when the next change will come.
While the markets reacted as if the Fed’s news was a showstopper, it’s a reminder that the Fed’s interest rate cuts are nearing their end. The anticipated end of the rate cuts by 2025 signals this break. Analysts say the “Trump blessing” could turn sour if yields increase and inflation rises in the coming months, effectively putting an end to rate cuts.
Finally, despite the current Fed-induced angst, strong economic growth and solid earnings can offer a counterbalance. Analysts recommend looking beyond the immediate fears to the broader economic trends supporting stocks moving forward.
