US stocks tumble as Federal Reserve eyes fewer 2025 rate cuts, Dow falls 2.6%

All three major indices finished firmly lower after the Fed projected just two interest rate cuts next year, down from four.

The Dow slid 2.6 percent, or more than 1,100 points, to 42,326.87.

The broad-based S&P 500 dropped 3.0 percent to 5,872.16, while the tech-rich Nasdaq Composite Index slumped 3.6 percent to 19,392.69.

“Seeing the kind of decline we are experiencing right now indicates that the Fed took the market quite by surprise,” said CFRA Research’s Sam Stovall.

Although stocks often enjoy a late-year bounce referred to as the “Santa Claus rally,” Stovall said the depth of Wednesday’s drop could spur more selling if traders take profits.

“Maybe Santa is already on vacation,” he said.

The US central bank, as expected, moved ahead with a decision to reduce interest rates by a quarter point as Fed Chair Jerome Powell offered an upbeat appraisal of the US economy.

But the announcement was coupled with the altered outlook on 2025 monetary policy.

After the latest interest rate cut, the Fed is now “significantly closer” to the point where no further cuts will be needed, said Powell, who emphasized the central bank still views two percent inflation as a critical long term priority.

In the last couple of months the Fed’s favored inflation measure has ticked higher, moving away from the bank’s long-term target of two percent.

Wall Street’s reaction suggests the investors are “grappling” with the likelihood that interest rates “for all intents and purposes, are going to remain higher for longer,” said Briefing.com.

Wednesday’s losses were broad-based with 29 of 30 companies in the Dow ending lower and all 11 sectors in the S&P 500 finishing in the red.

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