US Stock Markets Crash After Interest Rate Decision
The US stock markets plummeted on Wednesday after the interest rate decision. The Dow Jones Industrial Average turned from a small plus to a significant minus immediately after the announcement and closed at 42,327 points, a 2.6% decline. This marks the longest negative streak of the index in about 50 years, with 10 consecutive loss days.
The Nasdaq, which had performed better in the previous days, crashed even harder, dropping 3.6% to 21,209 points. The broader S&P 500 also fell sharply, ending at 5,872 points, a 3.0% decline.
Although the Federal Reserve had cut the target corridor for the federal funds rate by 0.25 percentage points to a range of 4.25 to 4.5%, this was widely expected. However, the new projections revealed only limited potential for further rate cuts, which the market had hoped for. The median forecast now sees a federal funds rate of 3.9% instead of the previously expected 3.4% in September, a reduction of 50 basis points in the room for rate cuts compared to three months ago.
The background is an adjusted inflation outlook: Instead of the expected decline in the personal consumption expenditures price index to 2.1% in September, a rate of 2.5% is now projected. The Fed expects to be back on track with a then-expected inflation rate of 2.1% in 2026.
Even with the rate cut in December, the central bankers seemed to have a hard time, with Fed Chief Jerome Powell describing the decision as a “close call.” At the same time, he emphasized that the Fed had come closer to the end of the monetary policy easing cycle with the current rate decision.
“The message today couldn’t have been clearer” analyzed Thomas Gitzel of VP Bank Group. “Although there may be two more rate cuts of 25 basis points on the agenda for next year, the Fed currently sees no more room for maneuver – the wording is far too marked by caution.” The Fed has driven home clear stakes with its meeting: There will be no significant rate cuts, as the US economy is too strong, according to the Fed, and the risks remain from Donald Trump’s tariffs, as the Fed emphasized.
The further Fed plan has also become clearer with this meeting, according to Gitzel: Two rate cuts are indeed on the agenda for next year, but this is likely to be the maximum and not the minimum. The Fed will already take a first pause in January, the financial expert said.
There were significant movements on the foreign exchange market in the evening as well, with the European common currency becoming sharply weaker. One euro cost only 1.0374 US dollars (-1.15%), and one dollar was worth 0.9639 euros, making the dollar as expensive as it has been for over two years from a European perspective.
The gold price also fell sharply, with a fine ounce being worth 2,595 US dollars (-2.0%) at the end of the day, equivalent to a price of 80.41 euros per gram.