Stocks Tumble Amid Federal Reserve’s Warning on Rate Cuts

Fed Signals Cautious Approach to Rate Cuts

U.S. stocks dropped sharply after the Federal Reserve announced a third consecutive interest rate cut. Despite this move, the central bank signaled a slower pace of rate cuts next year, sparking investor concerns.

The Federal Reserve lowered its key lending rate to a target range of 4.25% to 4.5%, a full percentage point reduction since September. This decision followed progress in stabilizing prices and efforts to prevent economic slowdown. However, recent data showed stronger-than-expected job growth and persistent inflationary pressures.

Federal Reserve Chairman Jerome Powell addressed these challenges in a press conference. “We are in a new phase of the process,” he said. “From this point forward, it’s appropriate to move cautiously and look for progress on inflation.”

The Dow Jones Industrial Average fell 2.58%, marking its 10th consecutive loss and its longest losing streak since 1974. The S&P 500 and Nasdaq Composite also declined by 3% and 3.6%, respectively. In Asian markets, Japan’s Nikkei 225 dropped 1.2%, and Hong Kong’s Hang Seng fell 1.1%.

Inflation Concerns and Market Reactions

U.S. inflation rose to 2.7% in November, defying expectations of a slowdown. Analysts warn that President-elect Donald Trump’s proposed tax cuts and import tariffs may drive prices higher. Lowering borrowing costs could further fuel demand, leading to increased consumer and business spending, which typically raises prices.

Jerome Powell defended the decision to cut rates, citing a cooling labor market over the past two years. However, he acknowledged it was a “closer call” this time, admitting that uncertainty remains as the White House prepares for a transition.

Olu Sonola, head of U.S. economic research at Fitch Ratings, interpreted the Fed’s stance as a “pause” on cuts, influenced by policy uncertainty under the incoming administration. “Growth is still good, the labor market is still healthy, but inflationary storms are gathering,” Sonola noted.

The latest rate cut, opposed by one Fed policymaker, is the last before President-elect Trump takes office. Trump’s campaign promised to lower both prices and interest rates, but mortgage rates have risen since September. Market expectations suggest borrowing costs will remain relatively high.

Fed forecasts now project its key lending rate to drop to 3.9% by the end of 2025, higher than the 3.4% forecast three months earlier. Inflation expectations also increased, with the Fed predicting a 2.5% inflation rate next year, above its 2% target.

Brean Capital’s Chief Economic Advisor, John Ryding, criticized the timing of the rate cut, arguing the economy’s strong position didn’t warrant it. “The economy looks strong… What’s the rush?” Ryding said. He warned that gains made in controlling inflation could be lost.

Bank of England Faces Similar Inflation Challenges

The Federal Reserve’s announcement precedes the Bank of England’s upcoming decision on interest rates. Analysts expect the Bank of England to maintain its benchmark rate at 4.75%, even as inflationary pressures rise.

Monica George Michail, associate economist at the National Institute of Economic and Social Research, noted the Bank of England faces intense wage growth and rising service prices. Upcoming hikes to the minimum wage could further fuel inflation, she added.

Unlike the Fed, the Bank of England’s mandate does not require consideration of unemployment. John Ryding argued that this allows the Bank of England to respond more prudently to inflation risks. “The Bank [of England] is being more of a prudent central bank than the Fed is right now,” he said.

As U.S. and global markets brace for further volatility, central banks face mounting pressure to balance economic growth with inflation control.

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