Dow falls 1,100 points on disappointing Fed interest rate news

The stock market swooned Wednesday in response to a piece of news that might not seem all that dire on first read: The Federal Reserve could cut interest rates fewer times in 2025 than experts had predicted.

The Dow Jones Industrial Average shed 2.6%, or 1,123 points, closing at 42,327. The S&P 500 lost nearly 3%, closing at 5,872. The Nasdaq Composite lost 3.6%, closing at 19,393.

The S&P 500 and Nasdaq have traded at or near record highs in recent days, partly in anticipation of a rate cut by the Fed.

But the Dow has had a long December. Wednesday marked the 10 ^th consecutive losing session for the index, its longest down streak since 1974.  A four-digit slide on a single day is a rare event.

The Federal Reserve lowered its benchmark interest rate by a quarter point Wednesday, a move that forecasters had predicted and largely applauded.

Fed now predicts fewer interest rate cuts in 2025

But t he Fed also forecast a markedly slower pace of rate cuts next year, partly in response to resurgent inflation. Analysts now predict just two interest-rate cuts in 2025, half as many as they had projected a few months ago.

“Santa came early and dropped a [quarter-point] rate cut in the market’s stocking but accompanied it with a note saying that there would be coal next year,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management in Charlotte, North Carolina.

Before Wednesday, stock traders hoped the Fed would remain aggressive with interest-rate cuts next year, potentially extending the current bull market.

Federal regulators predict strong economic growth and a more robust job market in 2025, along with higher inflation. While some of those tidings are good, the market reacted with a collective raspberry.

“The main takeaway from today’s Fed meeting was that inflation risks are back, and the Fed is clearly concerned,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management in Minneapolis, Minnesota.

For some analysts, the takeaway from Wednesday's stock market movements was that stock traders had overreacted to the Fed's actions.

"Markets have a really bad of habit of overreacting to Fed policy moves," said Jamie Cox, Managing Partner for Harris Financial Group in Richmond, Virginia. "The Fed didn’t do or say anything that deviated from what the market expected—this seems more like, 'I’m leaving for Christmas break, so I’ll sell and start up next year.' The good news is that this 10-day sell off should lay the path for a Santa Rally leading into next week."