Market Turmoil Following FOMC Decision Highlights Lingering Uncertainties
2min read The Federal Open Market Committee’s (FOMC) widely anticipated rate cut failed to provide the stock market with the boost investors might have hoped for. Instead, markets reeled following the announcement, with the S&P 500 plunging 178 points, the Nasdaq Composite falling 3.5%, and the Dow Jones Industrial Average tumbling over 1,100 points. This marks the Dow’s tenth consecutive decline, a stark contrast to the robust year-to-date gains across major indices.
FOMC Decision and Market Reaction
The FOMC delivered a 25-basis-point cut to the federal funds rate, lowering the range to 4.25–4.50%. However, this decision was accompanied by hawkish undertones. The dissent from Cleveland Fed President Hammack, who advocated for no rate cut, highlighted divisions within the committee. Moreover, the Summary of Economic Projections showed upward revisions for inflation in 2024 and 2025, alongside a reduced unemployment forecast.
Perhaps most concerning to markets was the upward adjustment to the 2025 fed funds rate projection, now expected to average 3.9%, compared to 3.4% in the previous estimate. This suggests that the Fed anticipates only 50 basis points of easing in 2025, down from earlier expectations of 100 basis points. These projections reflect the Fed’s cautious stance amid concerns over persistent inflation and a resilient labor market.
Bond Market Selloff
The bond market responded sharply to the Fed’s guidance, with yields climbing across the curve. The 10-year Treasury yield rose 11 basis points to 4.49%, while the 2-year yield, more sensitive to monetary policy expectations, surged to 4.35%. These moves signal that investors are pricing in the likelihood of rates remaining higher for an extended period. Sticky inflation and a strong labor market were underscored as key factors driving this outlook.
Sector-Wide Retreat
The stock market’s selloff was broad-based, with all 11 sectors of the S&P 500 closing in the red. Losses ranged from a 1.4% decline in health care to a steep 4.7% drop in consumer discretionary stocks. The equal-weighted S&P 500 fell 3%, reflecting the depth of the retreat across large, mid, and small-cap stocks.
While major indices have posted impressive gains for the year—up 29.2% for the Nasdaq, 23.1% for the S&P 500, and 12.3% for the Dow—the market’s reaction to the Fed decision underscores lingering uncertainties about the trajectory of monetary policy and its implications for equity valuations.
Economic Data Highlights
The FOMC meeting coincided with mixed economic data, which likely added to market unease:
- Housing data showed a 6.4% rebound in single-unit starts, driven by recovery in the South following hurricanes. However, single-unit permits, a forward-looking indicator, were up just 0.1%, signaling caution among builders.
- The Q3 current account deficit widened to $310.9 billion, higher than the consensus estimate of $283 billion, reflecting persistent trade imbalances.
- Mortgage applications fell 0.7%, following a 5.4% increase in the prior week, indicating sensitivity to elevated mortgage rates.
Looking ahead, investors will focus on a host of economic releases, including weekly jobless claims, the final estimate for Q3 GDP, and November existing home sales. These data points will provide additional insight into the health of the economy as 2024 concludes.
Global Markets and Commodities
Overseas markets were mixed, with European indices posting modest gains while Asia saw uneven performance. Commodities reflected a subdued trading environment, with crude oil edging higher to $69.95 per barrel and gold falling to $2,653.60. The movements in gold and silver suggest reduced safe-haven demand amid rising yields.
Outlook for the Year Ahead
The FOMC decision reinforces the narrative that rates will remain higher for longer, a development that poses challenges for equity markets. Investors face a delicate balancing act, weighing robust year-to-date gains against the prospect of tighter financial conditions persisting into 2025.
As markets digest the implications of the Fed’s guidance, the focus will shift to upcoming economic data and the January FOMC meeting. Any signs of moderating inflation or labor market cooling could bolster hopes for more accommodative monetary policy. Conversely, persistent strength in these areas could heighten concerns about valuation risks.
For now, the market appears caught between optimism over a resilient economy and caution about the Fed’s resolve to maintain its inflation fight. Investors should brace for continued volatility as the interplay of these factors shapes the path forward.
