U.S. stocks plummeted to one of their worst days of the year after the Federal Reserve indicated Wednesday it might deliver fewer interest rate cuts for the U.S. economy in 2025 than previously anticipated. The S&P 500 dropped 2.9%, nearing its largest loss for the year, further receding from its all-time high reached a couple of weeks ago. The Dow Jones Industrial Average declined 1,123 points, or 2.6%, and the Nasdaq composite fell 3.6%.
The Fed announced Wednesday it's reducing its key interest rate for the third time this year, continuing the sharp reversal initiated in September when it began lowering rates from a two-decade high to bolster the job market. Wall Street favors lower interest rates, but this cut was widely expected. The primary concern revolves around how much further the Fed will cut rates next year. This is crucial, especially after expectations for a series of cuts in 2025 fueled the U.S. stock market to hit an all-time high 57 times in 2024. Fed officials released projections Wednesday showing the median expectation among them is for two more rate cuts to the federal funds rate in 2025, amounting to half a percentage point. This is down from the four cuts anticipated just three months ago. 'We are in a new phase of the process,' said Fed Chair Jerome Powell. The central bank has already swiftly lowered its main interest rate by a full percentage point to a range of 4.25% to 4.50% since September. When asked about the reasons behind Fed officials' shift toward slowing rate cuts, Powell cited the robust performance of the job market and the recent uptick in inflation readings. He also mentioned uncertainties that will necessitate policymakers to respond to forthcoming, yet-to-be-determined economic changes. While lower rates can stimulate the economy by making borrowing cheaper and boosting investment prices, they can also exacerbate inflation
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