On December 18, the U.Sstock market faced significant declines, with all three major indices dropping over 2%. The Dow Jones Industrial Average saw a staggering loss, marking its longest consecutive decline since 1974, continuing a downward spiral for ten trading sessions in a rowThe bearish market sentiment can be largely attributed to the hawkish stance taken by the Federal Reserve amidst increasing economic uncertainties.

When the trading day closed, the Dow Jones was reported at 42,326.87, reflecting a decrease of 2.58%. The S&P 500 index dropped by 2.95%, closing at 5,872.16 points, while the Nasdaq composite experienced the largest decline at approximately 3.56%, landing at 19,392.69. Investors were also rattled by Tesla Inc., a company that had recently enjoyed a surge, its stock plummeting over 8% after hitting an all-time high of $488.54 just the previous week.

The bears ruled the market on the day the Federal Reserve announced its latest interest rate policy

Following their decision, U.STreasury bonds took a nosedive, resulting in striking jumps in yieldsThe 10-year Treasury yield reached a peak not seen since late May of this year, spiking to 4.51% before ultimately ending the day at 4.492%, reflecting a rise of 10.7 basis pointsThe dollar index soared, briefly hitting 108.26, the highest level since November 2022, finishing up 1.08% at 108.08. Meanwhile, gold prices dropped to a monthly low, as spot gold tumbled 2.2% to settle at $2,587.63 per ounceCryptocurrency also felt the repercussions, with Bitcoin experiencing a steep decline of 5.3% to $100,752, only the day prior having seen it exceed $108,000 for the first time.

On the same day, the Federal Reserve surprisingly announced a rate cut of 25 basis points, in line with market expectations, adjusting the federal funds rate target range to between 4.25% and 4.5%. This represented the third consecutive decrease, following cuts of 50 and 25 basis points in September and November, respectively

Surprisingly, while this decision to lower rates was not shocking by itself, the accompanying hawkish signals further unsettled Wall StreetThe latest dot plot from the Fed indicated policymakers expect to lower rates twice in 2025, a stark contrast to the prediction made in September, which had anticipated four rate cuts next yearMoreover, the median projection for long-term federal funds rate was raised from 2.9% to 3%.

Dean Maki, chief economist at Point72 Asset Management, noted that the Fed is inching closer to that neutral interest rate level that they have long mentionedAccording to Maki, this could indicate a potential slowdown in the pace of rate cuts moving forwardMoreover, the Fed also raised its GDP growth forecasts for the coming years while simultaneously adjusting its unemployment projections downward, even as it increased inflation expectations for 2024 to 2026.

Fed Chair Jerome Powell emphasized the need for a cautious approach during the post-announcement press conference

He reiterated multiple times that the Federal Reserve has lowered its policy rate by a full percentage point from peak levels during this recent rate-cutting cyclePowell suggested that this easing of restrictive monetary policy should pave the way for more cautious and thoughtful considerations regarding future adjustments to interest rates.

While the December rate cut might seem definitive, Powell commented that the decision was both challenging yet appropriateHe elaborated on the delicate balance the Fed seeks to maintain: moving too slowly may weaken the labor market unnecessarily, while acting too hastily could jeopardize the progress made in controlling inflationHence, the Federal Reserve is walking a tightrope to find equilibrium between these competing risks.

Looking ahead, the recently-elected president of the United States has publicly stated intentions to roll out a radical tariff plan once taking office, fueling concerns among economists that this could trigger another spike in inflation

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As such, Federal Reserve officials have begun considering the impacts of such sweeping economic changes once the new administration begins its tenurePowell indicated that the officials are undertaking initial assessments regarding the tariff proposals and their potential implications on inflation, which remain somewhat fuzzy at this point.

In discussing the trajectory of future monetary policy, Powell admitted that the Federal Reserve is at a juncture where it is slowing down its rate cutsAny decisions regarding rate reductions in 2025 will be based on forthcoming data rather than the current economic climateWith the Federal Reserve aimed at maintaining a robust labor market while striving to reduce inflation back to the 2% target, it seems unlikely that any rate increases will occur in the coming year.

The dual mission of managing inflation while ensuring employment stability remains a focal point for the Fed

Powell articulated a clear awareness of the substantial price increases being felt across various sectors, citing essential costs such as food, transportation, and heating as areas where the public is experiencing the pinch of elevated pricesThe global surge in inflation has engendered considerable hardship, and although current inflation levels have seen significant declines, the pressure of high prices is still very much felt by consumers.

Regarding the labor market, Powell acknowledged there are signs indicating a cooling trend, albeit at a slower pace that does not raise immediate concernsThis suggests that while the labor market is adjusting, it remains in a relatively stable state without signs of panic.

Overall, it seems that the Federal Reserve's path towards reducing interest rates is not coming to a halt, but rather is merely slowing downPowell issued a reminder that interest rates continue to exert a "significant" restraint on economic activity, and that the Fed is still on the trajectory to continue lowering rates