Wall Street tumbles after the Federal Reserve hints at just 2 rate cuts for 2025

By STAN CHOE
AP Business Writer

NEW YORK — U.S. stocks are tumbling toward their worst day in four months after the Federal Reserve hinted Wednesday it may deliver fewer of the cuts to interest rates that Wall Street loves than earlier thought.

The S&P 500 dropped 2.6% to pull further from its all-time high set a couple weeks ago. The Dow Jones Industrial Average sank 961 points, or 2.2%, with less than half an hour remaining in trading, and the Nasdaq composite dropped 3.5%.

The Fed said Wednesday it’s cutting its main interest rate for a third time this year, continuing the sharp turnaround begun in September when it started lowering rates from a two-decade high to support the job market. That cut, though, was widely expected.

The bigger question centers on how much more the Fed will cut next year. A lot is riding on it, particularly after expectations for a series of cuts in 2025 helped the U.S. stock market set an all-time high at least 57 times in 2024.

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's down from the four cuts expected just three months ago.

“We are in a new phase of the process,” Fed Chair Jerome Powell said after the central bank quickly eased its main interest rate by a full percentage point to a range of 4.25% to 4.50% since September.

Asked why Fed officials are looking to slow their cuts, Powell pointed to how the job market looks to be performing well overall, recent inflation readings have picked up and other uncertainties that will require policy makers to react to upcoming, to-be-determined changes in the economy. While lower rates can offer a boost to the economy by making it cheaper to borrow and boosting prices for investments, they can also offer more fuel for inflation.

Powell said some Fed officials, but not all, are also trying to incorporate uncertainties inherent in a new administration coming into the White House. Worries are rising along Wall Street that President-elect Donald Trump’s preference for tariffs and other policies could further spur 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, ramping up the pressure on the stock market.

The yield on the 10-year Treasury rose to 4.49% from 4.40% late Tuesday. 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.