S&P 500 Sees Worst Fed Day Since 2001; Yields Up: Markets Wrap

The Federal Reserve jarred US markets Wednesday, pushing stocks lower and sending Treasury yields soaring, after forecasting fewer interest rate cuts next year. It was the worst loss for the S&P 500 on the day of a rate decision since 2001.

The S&P 500 fell below the 6,000 level, suffering its worst session since August. The tech-heavy Nasdaq 100 dropped 3.6%, the most in five months. Micron Technology Inc. fell post-market after reporting earnings.

The policy-sensitive two-year US Treasury yield surged 10 basis points to 4.35% and the 10-year rate rose to a level last seen in May. Bloomberg’s gauge of the dollar jumped to its highest since November 2022.

While Jerome Powell delivered a widely expected quarter-point rate cut following a meeting of the Federal Open Market Committee, the central bank signaled increasing wariness around inflation, including a reduction in how far members expect easing to go in 2025. Powell reemphasized that the central bank would be more cautious as it considers further adjustments to the policy rate and said the Fed is committed to reaching its 2% target.

“We need to see progress on inflation,” Powell said. “That is how we are thinking about it. It is kind of a new thing. We moved quickly to get to here but moving forward we are moving slower.”

The velocity of Wednesday’s drop befit the speed with which the Fed’s pivoted back to an inflation-leery posture. Before the latest session, the S&P 500 had surged more than 10% since the FOMC’s July 31 rate decision, at which the central bank dropped its one-sided risk assessment and said keeping the labor market expanding had become a bigger priority.

In Wednesday’s briefing, the chair also said some policymakers had begun to incorporate into their forecasts the potential impact of higher tariffs that President-elect Donald Trump may implement. But he said the impact of such policy proposals was at this point highly uncertain.

Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, called Powell “a hawk in dove’s clothing.”

“Despite playing down the recent slowdown in disinflation while boasting about the strength of economic momentum, he still hinted that tariffs won’t be written off as transitory and that the two-cut forecast for 2025 is necessary because policy must remain restrictive,” he said.

The last time the S&P 500 saw losses of the magnitude on Fed’s decision day was on Sept. 17, 2001, when the index fell nearly 5%. It fell 12% on March 16, 2020, a day after the Federal Reserve’s emergency weekend meeting during the pandemic.

Whitney Watson of Goldman Sachs Asset Management expects the Fed to skip a rate cut in January before resuming on its easing path in March.

“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at the firm, said.