US markets see biggest slide since summer as Fed cuts rates, but signals fewer to come in 2025

US markets took a significant hit last night after the Federal Reserve indicated a more cautious approach to interest rate cuts in the coming year. The Dow Jones fell 2.6 per cent, the S&P 500 dropped three per cent, and the Nasdaq declined by 3.6 per cent following the Fed's announcement.

This marked the most substantial fall in US markets since recession fears surfaced over the summer, and the largest drop for the S&P post a Fed meeting since 2011. Despite the Fed cutting rates by 25 basis points last night, its summary of economic projections suggested only two rate cuts throughout 2025, down from four in September, as reported by City AM.

Inflation forecasts were notably upgraded, with the Fed's preferred inflation measure, personal consumption expenditures, predicted to average 2.5 per cent in 2025, up from 2.1 per cent. Most Fed committee members now view the risks to core PCE as leaning towards the upside, with one member even voting against the rate cut altogether.

"Aside from the decision itself, just about every other aspect leant in a more hawkish direction than expected," Deutsche Bank analysts commented. Jerome Powell, the chair of the Fed, followed this up in a press conference post-decision, stating that the latest rate cut "was a closer call", and they were "at a point at which it would be appropriate to slow the pace of rate cuts".

Powell highlighted the need for the central bank to witness further "progress on inflation" before considering additional rate cuts, stating that they are "not going to settle" for inflation rates persisting above two percent. Jean Boivin, head of the Blackrock Investment Institute, pointed out that the Fed's estimate of the neutral rate has been revised upwards, suggesting that the policy rate might be nearing that level.