Dow plunges by more than 1,100 points after Fed projects fewer rate cuts next year

The Dow fell by 1,123 points Wednesday, ending the day 2.58% lower after the Federal Reserve indicated in a policy statement that it is forecasting just two interest rate cuts in 2025, not the previously projected four.

Fed Chair Jerome Powell also refused to say the central bank would not hike rates, telling reporters Wednesday: “You don’t rule things completely in or out in this world.”

This was the 10th day of losses for the blue-chip index and marked the first such losing streak since 1974, when Gerald Ford was president. However, the previous days’ losses were nowhere near the rapid decline seen Wednesday.

Wall Street had expected the Fed to cut rates, but the statement that it is expecting just two rate cuts in 2025 fueled a broad selloff.

Jay Hatfield, CEO and CIO at Infrastructure Capital Advisors, said stocks fell in response to the Fed’s “hawkish cut,” which means implementing a rate cut while signaling that monetary conditions might remain tight in the future.

“The Fed’s admitted uncertainty as to monetary policy actions in 2025, combined with the expectation of only two cuts (rather than four) in 2025 amplified investor uncertainty and concern, triggering profit taking this year versus delaying into the new year,” Sam Stovall, chief investment strategist at CFRA Research, said.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve today in Washington.

The Federal Reserve has made “a great deal of progress” in getting price hikes back to a more normal pace, but Americans are still toiling in the aftermath of the inflationary spike, Chair Jerome Powell said Wednesday.

“There’s tremendous pain in that burst of inflation that was very global — this was everywhere in all advanced economies at the same time,” Powell said. “Now, inflation itself is way down, but people are still feeling high prices.”

As inflation rose sharply, driving prices higher in every aspect of life, it gnawed away people’s wage gains in the process.

Inflation’s descent has started to help people catch up: Average pay growth has outpaced inflation for 19 months running, Bureau of Labor Statistics data shows. Despite the gains, average hourly earnings are still running below where they were in February 2021, right before inflation started to accelerate.

“The best we can do for [Americans], and that’s who we work for, is to get inflation back down to its target and keep it there so that people are earning big, real wage increases so that their wages are going up, their compensation is going up faster than inflation year upon year upon year,” Powell said.

“And that’s what will restore people’s good feeling about the economy. That’s what it will take, and that’s what we’re aiming for.”

Cranes used for shipping containers rise from the Port of Newark on September 30 in New York City.

Federal Reserve officials tend to go out of their way to avoid wading into politics, especially when it comes to hot topics like the significant, broad-based tariffs President-elect Donald Trump has threated to put in place.

At the same time, the tariffs he’s pledged could have a huge impact on the economy, and as Fed officials cast votes on where they believe interest rates should be to fulfill their mandate for stable prices and maximum employment, they have to consider the effect of fiscal policy.

For now, Fed Chair Jerome Powell said the effects higher tariffs could have on the economy “is not a question that’s in front of us right now.”

“We don’t know when we’ll face that question,” Powell told reporters Wednesday. At the moment, though, Fed officials are seeking to understand the ways in which “tariffs can affect inflation in the economy.”

When officials see the actual policies in writing, they’ll be able to make “a more careful, thoughtful assessment of what might be the appropriate policy response,” Powell said. He did suggest, though, that shifts away from importing as many goods from China in recent years, which has happened as tariffs have remained high on imports from the country, may have contributed to the recent episode of high inflation.

U.S. Federal Reserve Chair Jerome Powell speaks during a press conference where he announced the Fed had cut interest rates by a quarter point following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington on December 18.

While most of the questions Federal Reserve Chair Jerome Powell fielded from reporters on Wednesday dealt with the likelihood and pace of potential rate cuts next year, at the tail end of Powell’s press conference, one reporter asked if he could rule out hiking rates next year.

With inflation just a hairline above the Fed’s 2% target and the labor market in fairly solid shape — though it has weakened over the course of this year — you’d think Powell could firmly say the central bank isn’t going to hike rates next year.

But, instead, he said, “You don’t rule things completely in or out in this world,” implying that it’s not impossible that the Fed delivers a rate hike next year.

However, he said he doesn’t view that as “a likely outcome.”

In an aerial view, homes sit on lots in a residential neighborhood on March 15, 2024, in Miami, Florida.

The Federal Reserve cut its benchmark interest rate by a quarter point on Wednesday, but it is projecting that it will cut interest rates only twice in 2025. Here’s how housing economists and other experts say that will impact mortgage rates and the housing market more broadly:

“Mortgage rates will modestly trend lower. Given that mortgage rates have stayed above 6% for more than two years, consumers are getting used to the new normal, especially considering that the 50-year average is 7.7%. Jobs and inventory will drive home sales.” – Lawrence Yun, National Association of Realtors chief economist

“A slower pace of interest rate cuts in 2025 means borrowers will have to continue doing the heavy lifting of aggressive debt repayment. Borrowing rates for variable rate debts such as credit cards and home equity lines of credit are high and won’t come down fast enough to provide meaningful relief,” – Greg McBride, Bankrate chief financial analyst

“It’s unlikely this is going to have a significant impact on mortgage rates in the near term. Ultimately investors must be more convinced that inflation is on a permanently downward trend before we see long-term rates come down as well. Until then, the cost of housing will remain too high and unless we build more housing that is affordable to most Americans, it is going to stay that way.” – David Dworkin, CEO of the National Housing Conference

Shoppers enter an Amazon Fresh grocery store on December 12 in Federal Way, Washington.

Inflation cooled rapidly for much of this year. However, in recent months, that progress stalled out. Or, even worse, it has moved in the wrong direction.

That’s a story that has played out in recent consumer- and wholesale-level inflation readings, and it’s expected to be fully on display come Friday when the Personal Consumption Expenditures price index (the Federal Reserve’s preferred gauge) is released.

Economists expect that the PCE will accelerate to an annual rate of 2.5% from 2.3% and the core reading, which excludes gas and food, will tick up to 2.9% from 2.8%, according to FactSet.

“We have been moving sideways,” Fed Chair Jerome Powell said Wednesday.

Part of that is because of “base effects,” or comparisons to a 12-month ago period when inflation slowed much more rapidly, and partly because of housing-related inflation and how it’s measured. But, it’s also been just plain sticky, and that played a huge role in the Fed curtailing its plans for rate cuts next year, Powell said.

“I can tell you that might be the single-biggest factor (behind the rate cut projections): Inflation has once again underperformed relative to expectations,” Powell said.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve, Wednesday, Dec. 18, 2024, in Washington.

The Federal Reserve has cut its benchmark interest rate by a full percentage point since September, but Americans looking to take out a home loan may not have felt much of a difference yet.

Mortgage rates fell to 6.08% in September, after the Fed cut rates for the first time in four years, but they have since bounced to a higher level.

The average rate on a standard, 30-year fixed mortgage was 6.6% in the week ending December 12, according to data from Freddie Mac. While that’s significantly lower than last year’s peak of 7.79%, it’s higher than where some economists expected mortgage rates to end up by the end of 2024.

Rather than moving lower in tandem with the central bank’s rate cuts, Powell said mortgage rates have stayed higher on the back of longer-term economic projections in the US.

“Longer rates have actually gone up quite a bit since September,” Powell said. “Those are the things that drive, for example, mortgage rates more than short-term rates do.”

The Fed doesn’t directly set mortgage rates. Instead, mortgage rates track the 10-year Treasury yield, which has climbed in recent weeks, in part on recent strong economic data.

“If we look at what’s happening in the economy, most forecasters have been calling for a slowdown in growth for a very long time, and it keeps not happening,” Powell said. “We are now well into another year of growth.”

A sale sign stands outside a home in Denver on October 17.

Federal Reserve Chair Jerome Powell highlighted the state of the US housing market early in his remarks on Wednesday.

“Activity in the housing sector has been weak,” Powell said.

Indeed, homebuying and selling have been anemic this year. Just 3.96 million existing homes have been sold through October 2024, according to the latest data from the National Association of Realtors. That puts this year on track for the slowest pace of existing home sales since 1995.

Persistently high home prices and stubbornly high mortgage rates have kept would-be homebuyers on the sidelines. The median home sales price was $407,200 in October, according to NAR data. That’s the 16th consecutive month of year-over-year price gains.

At the same time, millions of Americans who locked in lower mortgage rates before 2022 have been unwilling or unable to list their homes for sale because doing so would likely require them to buy a new home at a higher interest rate.

According to the Consumer Financial Protection Bureau, nearly 60% of the 50.8 million active mortgages have interest rates below 4%. The current average mortgage rate for a 30-year fixed loan was 6.6% last week, according to Freddie Mac.

Donald Trump at the Palm Beach County Convention Center in West Palm Beach, Florida, on election night, Tuesday, November 5.

The Federal Reserve is banking on higher-than-anticipated inflation after President-elect Donald Trump takes office.

Fed officials had thought their preferred inflation gauge, the Personal Consumption Expenditures price index, would be 2.1% by the end of 2025 at September’s monetary policy meeting, according to the median forecast included in the quarterly Summary of Economic Projections.

But at this month’s meeting, officials raised their forecast and are now predicting 2.5% inflation by year’s end next year, according to new projections released Wednesday.

What changed from September to December that would cause officials to foresee higher inflation? Trump won a second term.

Trump’s victory carries significant implications for the trajectory of inflation and the overall economy. For example, many economists have warned that some policies Trump promised to put in place, including broad-based tariffs and mass deportations of illegal migrants, could push prices Americans pay for goods and services up significantly.

Fed Chair Jerome Powell said Wednesday that Trump’s victory wasn’t the driving force leading officials to believe inflation would be higher in 2025, though. The “single biggest factor,” he said, was inflation underperforming relative to Fed officials’ expectations.

In recent months, inflation has heated up, moving further away from the Fed’s target. Many officials have also expressed concerns recently that inflation may prove to be stickier than previously thought to be.

A trader studies his screens as he works on the floor of the New York Stock Exchange on Wednesday, December 18.

US stocks tumbled Wednesday afternoon after the Federal Reserve cut rates by a quarter point and penciled in just two rate cuts next year.

The Dow fell by 490 points, or 1.1%, heading for a 10-day losing streak, its longest since 1978.

The S&P 500 fell by 1.3% and the tech-heavy Nasdaq fell by 1.6%.

The Fed was largely expected to cut rates by a quarter point. However, the Fed’s outlook for 2025 signals less urgency to ease monetary restrictions than traders previously anticipated, dampening the outlook for stocks.

In bond markets, Treasury yields gained. The 2-year Treasury yield gained 0.1% while the 10-year Treasury yield rose by 0.09%.

The US dollar also surged by 0.77%, signaling expectations of economic growth and further inflation in the US.

Even though all but one of 12 Federal Reserve officials cast a dissenting vote against cutting interest rates by a quarter point at the December meeting, Fed Chair Jerome Powell said the decision was “a closer call.”

That may imply that Fed officials had more conviction over what actions to take at prior monetary policy meetings this year. Cleveland Fed President Beth Hammack voted against cutting rates at this meeting, and Fed Governor Michelle Bowman voted for a smaller rate cut at the September meeting.

“We decided it was the right call because we thought it was the best decision to foster achievement of both of our goal, maximum employment and price stability,” Powell told reporters Wednesday.

US Federal Reserve Chairman Jerome Powell speaks at a press conference after the Monetary Policy Committee meeting in Washington, DC, on December 18.

At the December policy meeting last year, Federal Reserve officials penciled in three rate cuts for this year, according to median projections.

Their prediction was spot on, with the central bank indeed cutting rates three times this year after Wednesday’s quarter-point cut.

But by June’s meeting this year, Fed officials forecast just one cut for the year after inflation unexpectedly heated up. Then by September’s meeting, when the central bank began cutting rates, officials returned to their prior prediction for a total of three cuts for the year.

Meanwhile, traders were convinced around this time last year that the Fed would deliver six rate cuts in 2024, beginning with the March meeting, according to historical fed funds futures data.

The majority of traders now believe, there will be only one or two cuts in 2025. Fed officials latest projections, released Wednesday, predict two cuts next year.

Federal Reserve chair Jerome Powell speaks at the DealBook Summit in New York on December 4.

The Federal Reserve signaled through its latest policy statement that officials are leaning toward holding interest rates steady in the future.

The Fed typically uses the statement, released at the conclusion of each meeting, to give financial markets and other observers a heads up on what to expect from the central bank in the future.

The latest statement said that “the extent and timing” of additional rate cuts are to be determined, a key phrase that wasn’t in the previous statement.

The statement also lays out officials’ assessment of the economy. That description remained the same from the previous one, describing a robust economy with a solid labor market.

The Federal Reserve’s latest quarterly Summary of Economic Projections indicated officials believe they’ll cut rates twice next year, according to median forecasts. In September, Fed officials suggested there would be as many as four cuts in 2025.

Still, two cuts assumes the unemployment rate, which was 4.2% in November, rises only slightly to 4.3% by the end of 2025 and the Fed’s preferred inflation gauge reaches 2.5%, an increase from October’s 2.3% inflation rate, according to the latest forecasts officials made.

The new projections could very well prove to be meaningless, however, because much of the US economy’s performance will likely hinge on the policies President-elect Donald Trump and elected officials sign into law. Policies that Trump has promised, including broad-based tariffs and mass deportations, could drastically reshape the economy.

That could cause the Fed to rethink how many cuts, if at all, are needed next year.

The US Federal Reserve is seen in Washington, DC, on September 16.

The Federal Reserve on Wednesday cut interest rates by a quarter point, the third rate cut since it began to lower borrowing costs in September.

The central bank is attempting to ease pressure on America’s economy from elevated interest rates to preserve the labor market’s health.

However, the Fed’s latest rate cut could be the last one for months, since the economy remains in good shape and inflation has shown very little progress in recent months.

The Federal Reserve’s decision to lower rates by a quarter point did not receive unanimous support among all 12 officials who cast a vote at this month’s meeting.

Cleveland Fed President Beth Hammack voted against cutting rates at the meeting. “We are at or near the point where it makes sense to slow the pace of rate reductions,” Hammack, who joined the regional Fed bank in August, said earlier this month.

Her dissent comes after all 12 officials agreed on last month’s quarter-point cut. However, at the prior meeting in September, Fed Governor Michelle Bowman cast a dissenting vote, favoring a quarter-point cut instead of the half-point cut the other 11 officials favored. That marked the first time a Fed governor dissented since 2005.

The Federal Reserve is widely expected to lower interest rates by a quarter point this meeting. But not everyone thinks the central bank necessarily needs to do so.

Cleveland Fed President Beth Hammack, who will be casting a vote at this month’s meeting, said earlier in the month that, “We are at or near the point where it makes sense to slow the pace of rate reductions.” She said she believes the central bank may have lowered rates enough already such that they’ve approached what’s referred to as the “neutral rate,” which is when rates are at an optimal level to promote sustainable economic growth without sparking inflation.

Similarly, Fed Chair Jerome Powell said at a New York conference earlier this month, “We can afford to be a little more cautious.”

“I feel very good about where the economy is and where monetary policy is,” he added.

Former Boston Federal Reserve President Eric Rosengren said if he were still at the central bank, he’d oppose a rate cut at this meeting partly because policies President-elect Donald Trump campaigned on risk causing inflation to heat up again.

“Lower taxes, immigration and tariffs (are) likely all to be inflationary,” he said in an interview on CNBC this week. “We don’t know the magnitude of those changes. Policy hasn’t been really enunciated very clearly yet, but the direction is certainly to make it more difficult to reach the (Fed’s) 2% inflation target.”

Ed Yardeni, president of Yardeni Research, said he wishes the Fed wouldn’t cut rates this week. He said the central bank is likely to because they view the current level of interest rates as “too restrictive” in terms of dampening the economic outlook. However “that just doesn’t jive with what the markets are saying,” he said in a CNBC interview this week.

“They should see that the stock market is at an all-time high, gold is at an all-time high, bitcoin is at an all-time high. And then, of course, the economic data is extremely strong,” Yardeni said.

Herschel Wilson began stockpiling nonperishable food for his pets and his family of five as soon as President-elect Donald Trump was named the Republican nominee in August. Even if these goods don't get more expensive once Trump is back in the White House, he says he'll eventually need to buy them anyway so they won't go to waste.

The tariffs President-elect Donald Trump has floated have the potential to significantly increase the prices that consumers pay on nearly everything that isn’t made entirely in the US.

That’s pushing some people to stockpile goods, from toilet paper to pet food, in the belief that these items will cost a lot more if Trump follows through with the tariff threats.

Herschel Wilson told CNN he started building up a small stockpile of essential goods for his three pets and family of five based in Tacoma, Washington, in August, after Donald Trump had been named the Republican presidential nominee.

Once Trump won the election, “that changed everything again, and I started to stockpile pretty much everything,” Wilson said.

That includes canned goods, bottled water and, yes, lots and lots of rolls of toilet paper. So far, he estimates he’s spent $300 on stockpiling goods since the election. Going forward, he said he plans to spend $100 extra each month on top of regular grocery spending.

Companies are loading up, too. Stanley Black & Decker CFO Patrick Hallinan said at the company’s investor day last month that it is investing in building up higher inventory levels “for a number of reasons, not the least of which is tariffs.”

Read more here.

Trader Michael Milano works on the floor of the New York Stock Exchange, on Wednesday, December 18.

US stocks rose in anticipation of the Federal Reserve’s rate decision, set to be announced at 2 p.m. ET.

The S&P 500 rose 0.29% to hit 6,068 and the tech-heavy Nasdaq rose 0.22% to hit 20,153.

The Dow, which is trying to break a nine-day losing streak, gained 224 points, rising 0.52%.

If Dow ends the day lower, it will be the 10th straight losing session — the longest such streak since the Dow fell for 11 sessions in a row between September 20 and October 4, 1974.

The Dow’s bid to rise out of its slump is picking up pace as the Fed’s rate decision looms.

UnitedHealth stock, which contributed to the Dow’s slide, is up 3.26%.

Nvidia, which joined the Dow in November, is up 3.63%, reversing losses it suffered over the past week. The chipmaker is up around 180% this year but had slid in recent days, contributing to the Dow’s losing streak.

Investors largely expect that the Fed will cut rates by a quarter point, continuing the rate-cutting cycle it began in September.

While investors are keen to hear the rate decision, they will likely be most focused on the Fed’s expectations for the economy next year, detailed in the quarterly Summary of Economic Projections.

The report includes a forecast of rate cuts for next year, known as the Fed’s “dot plot.”

Jay Hatfield, chief executive of Capital Infrastructure Advisors, told CNN “all eyes” will be on the dot plot to get a sense of how the Fed is thinking about the future.

The US dollar slightly gained while Treasury yields were largely unchanged.

A container ship sits docked at the Port of Oakland, California, on December 9. U.S. President-elect Donald Trump is threatening new tariffs on multiple countries as his second term approaches, after making tariffs a signature of his 2024 Presidential campaign.

Just over a month from now, President-elect Donald Trump will have the power to levy tariffs on other nations at the flick of a pen. And once inaugurated on January 20, he has pledged to immediately impose a 25% tariff on Mexican and Canadian imports and increase tariffs on Chinese goods by an additional 10%.

On the campaign trail, he also promised to levy a 10% to 20% tax on all imports and increase tariffs on Chinese goods by at least 60%.

There are some doubts as to whether Trump will follow through with these plans and, instead, use them as a means to negotiate with other nations. However, if these significant, broad-based tariffs go into effect, it could send the US economy back to one of the most painful periods that took over a decade to resolve: stagflation — something the nation’s economy hasn’t experienced in over half a century.

Read more here.