By The Associated Press’s Stan Choe
NEW YORK — The Federal Reserve signaled Wednesday that it would provide the U.S. economy with fewer adrenaline boosts in 2025 than previously believed, which sent U.S. equities plunging to one of their worst days of the year.
The S&P 500 pulled farther from its all-time high established a few weeks ago, down 2.9%, just short of its largest loss of the year. The Nasdaq composite fell 3.6%, while the Dow Jones Industrial Average fell 1,123 points, or 2.6%.
In keeping with the dramatic turnaround it initiated in September when it began dropping rates from a two-decade high to bolster the job market, the Fed announced Wednesday that it is reducing its main interest rate for the third time this year. Although the drop was already widely anticipated, Wall Street loves lower interest rates.
How much more the Fed cuts next year is the most important question. There is a lot riding on it, especially after the U.S. stock market hit a record high of 57 times in 2024 due to predictions of a series of cuts in 2025.
Fed officials released projections on Wednesday showing the median expectation among them is for two more cuts to the federal funds rate in 2025, or half a percentage point s worth. That is less than the four cuts that were anticipated three months ago.
We are in a new phase of the process, Fed Chair Jerome Powell said. Since September, the central bank has swiftly lowered its main interest rate by one full percentage point, bringing it down to a range of 4.25% to 4.50%.
Powell gave two reasons when asked why Fed officials are considering slowing their cuts: the job market appears to be doing well overall, and recent inflation readings have increased. He also mentioned the uncertainties that will force policymakers to respond to future, as-yet-unknown shifts in the economy.
Lower interest rates can help the economy by lowering borrowing costs and raising investment prices, but they can also increase inflation.
Powell said some Fed officials, but not all, are also already trying to incorporate uncertainties inherent in a new administration coming into the White House. Worries are rising on Wall Street thatPresident-elect Donald Trump spreference for tariffs and other policies could further juice inflation, along with economic growth.
When the path is uncertain, you go a little slower, Powell said. It s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.
One official, Cleveland Fed President Beth Hammack, thought the central bank should not have even cut rates this time around. She was the lone vote against Wednesday s rate cut.
The reduced expectations for 2025 rate cuts sent Treasury yields rising in the bond market, squeezing the stock market.
The yield on the 10-year Treasury rose to 4.51% from 4.40% late Tuesday, which is a notable move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, climbed to 4.35% from 4.25%.
On Wall Street, stocks of companies that can feel the most pressure from higher interest rates fell to some of the worst losses.
Stocks of smaller companies did particularly poorly, for example. Many need to borrow to fuel their growth, meaning they can feel more pain when having to pay higher interest rates for loans. The Russell 2000 index of small-cap stocks tumbled 4.4%.
Elsewhere on Wall Street, General Mills dropped 3.1% despite reporting a stronger profit for the latest quarter than expected. The maker of Progresso soups and Cheerios said it will increase its investments in brands to help them grow, which pushed it to cut its forecast for profit this fiscal year.
Nvidia, thesuperstar stockresponsible for a chunk of Wall Street s rally to records in recent years, fell 1.1% to extend its weekslong funk. It has dropped more than 13% from its record set last month and fallen in nine of the last 10 days as its big momentum slows.
On the winning end of Wall Street, Jabil jumped 7.3% to help lead the market after reporting stronger profit and revenue for the latest quarter than analysts expected. The electronics company also raised its forecast for revenue for its full fiscal year.
All told, the S&P 500 fell 178.45 points to 5,872.16. The Dow Jones Industrial Average dropped 1,123.03 to 42,326.87, and the Nasdaq composite skidded 716.37 to 19,392.69.
People walk on Wall Street in New York’s Financial District on Wednesday, Dec. 18, 2024. (AP Photo/Peter Morgan, File)AP
In stock markets abroad, London s FTSE 100 edged up by less than 0.1% after data showedinflation accelerated to 2.6%in November, its highest level in eight months. The Bank of England is also meeting on interest rates this week and will announce its decision on Thursday.
In Japan, where the Bank of Japan will wrap up its own policy meeting on Friday, the Nikkei 225 slipped 0.7%. That was despite a 23.7% jump forNissan Motor Corp.,which said it was in talks on closer collaboration with Honda Motor Co., though no decision had been made on a possible merger. Honda Motor s stock lost 3%.
Nissan, Honda and Nissan alliance member Mitsubishi Motors Corp. agreed in August to share components for electric vehicles like batteries and to jointly research software for autonomous driving to adapt better to dramatic changes in the auto industry.
AP Writer Zimo Zhong contributed.
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