Stocks Plunge After Fed Outlook Disappoints

(Wednesday market close) Stocks in the U.S. plunged Wednesday afternoon, closing sharply lower as traders reacted to news that the Federal Reserve may not deliver the degree of rate-easing in 2025 that had been expected.

Major indexes had been higher ahead of the conclusion of the Fed's last meeting of the year, but reversed course and slid through the afternoon. At the close of trading, the S&P 500^® (SPX) had lost 178.45 points (2.95%) to 5,872.16, the Nasdaq Composite^® ($COMP) had fallen 716.37 points (3.56%) to 19,392.69, and the Dow Jones Industrial Average^® ($DJI) had dropped 1,123.03 points (2.58%) to 42,326.87. The Russell 2000^® (RUT), which tracks smaller-cap companies, declined 102.57 points (4.39%) to 2,231.51. For the Dow, it was its 10th consecutive daily decline.

The Cboe Volatility Index^® (VIX) surged 74% to 27.62. Shortly before the Fed meeting's conclusion, the VIX had been at 15.2. On the bond side, the 10-year Treasury yield rose, adding 12 basis points to 4.51% at 4 p.m. ET.

"Overall, the Fed is getting cautious," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. "The economy is doing well, inflation isn't moving lower as quickly as it would like, and the labor market is still healthy. While the Fed appears to still believe that its policy is too restrictive, there are many policy unknowns on the horizon that could alter the outlook. It looks like that bumpy ride in the bond market will continue into next year."

Before the selloff in equities, Fed policymakers had lowered interest rates by a quarter-point in what was the third cut of 2024 as expected. Investors quickly turned their attention to future clues on rates, and when the Fed signaled that only two more rate reductions were likely to occur in the year ahead, the negative reaction was swift and severe.

With the cut this week, the new fed funds target rate is now down to 4.25%–4.5%. In total, rates have been lowered by 100 basis points this year. The first reduction was by 50 basis points, while the last two have been 25 points each. Notably, one FOMC participant voted against lowering rates this week, favoring instead that rates be maintained at the prior band.

After the meeting, the odds of no change in rates at the January FOMC meeting rose to 91.4%, from 78.8% before the meeting, according to the CME FedWatch Tool. The January meeting will be the first of eight FOMC gatherings scheduled to take place in 2025.

What's important for investors to remember, whether that's after a significant pullback or on any other day, is that markets rise, and markets fall. Fluctuations and price changes are a given, and sometimes they are significant. While declines, especially when pronounced, can be troubling, it's also a reminder to revisit financial goals that have been set and to understand asset allocation, diversification and risk tolerance. And again, the key is not forgetting that markets go in both directions.