Stocks Tumble After Fed's Inflation Forecasts

 The Dow dropped over 1,100 points, nearing its longest losing streak since 1974.

Traders work on the floor of the New York Stock Exchange in New York City on Dec. 18.Michael Nagle

Dec. 19, 2024, 3:29 AM GMT+6

Major stock indices fell sharply on Wednesday after the Federal Reserve signaled a slower pace of interest rate cuts for 2025 than previously expected, reigniting concerns about the pace at which inflation will decline.

The S&P 500 dropped 2.4%, while the Nasdaq Composite lost nearly 3%, with losses accelerating as the trading day came to a close. The Dow Jones Industrial Average plunged over 1,100 points, marking its largest decline since August. This drop extended the Dow's losing streak to 10 consecutive days, putting it on track for its worst run in 50 years. However, much of this streak reflects a shift in investor focus from established companies to tech stocks, sectors to which the Dow is less heavily weighted.

The Fed's updated outlook revealed that it now expects only two cuts to its key federal funds rate next year, a sharp reduction from its previous forecast of four. This shift comes as the central bank anticipates inflation will remain above its 2% target well into 2026.

In essence, the Fed is signaling that interest rates will likely stay elevated for an extended period in order to curb inflationary pressures.

This is negative news for stocks, which typically benefit from lower interest rates, but presents a more nuanced outlook for the broader economy. Alongside its higher inflation forecasts, the Fed also projected that the unemployment rate would likely remain around 4.2%, suggesting a stable labor market.

Charlie Ripley, senior investment strategist at Allianz Investment Management, noted in a client commentary that the Fed appears more confident about the U.S. economy compared to a few months ago, but inflation concerns remain front and center. A key wildcard, according to Ripley, is President-elect Donald Trump, who has pledged to introduce tariffs that economists warn could lead to higher prices. Trump himself acknowledged in an NBC News interview that consumers could face higher costs once the tariffs are implemented.

Trump has cited various reasons for the tariffs—ranging from job creation to national security—without providing a clear picture of their long-term economic impact.

Uncertainties also persist about the U.S. fiscal outlook under Trump’s second term. While he has promised deep spending cuts, he has also vowed to reduce taxes, which could stimulate growth but also exacerbate the deficit.

For economists and policymakers, these factors create a complicated economic landscape, one that suggests the economy may continue to operate at an elevated pace.

"The economic and inflation environment does not suggest a need for significant policy stimulus, but the incoming administration may create an inflation challenge next year," said Seema Shah, chief global strategist at Principal Asset Management, in a commentary emailed to clients.