So why were stocks falling?
The Federal Open Market Committee (FOMC) lowered the federal funds rate by 25 basis points to the 4.25% to 4.50% range, as was widely expected.
This is the third straight meeting that the Fed has lowered rates.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the committee’s 2 percent objective but remains somewhat elevated,” read the FOMC’s statement, released Wednesday.
The committee determined that the risks to achieving its employment and inflation goals are roughly in balance. However, with an uncertain economic outlook, the committee remains attentive to the risks on both sides of its dual mandate.
The committee added that it will “carefully assess incoming data, the evolving outlook, and the balance of risks” when considering the extent and timing of additional adjustments.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the statement read.
The FOMC did have one dissenting vote, Cleveland Fed President Beth Hammack, who preferred no rate changes. It is the second time this year that an FOMC member voted no, following Fed Governor Michelle Bowman in September.
Bowman was in favor of a 25 basis point cut, not the 50-point cut that was approved in September.
Dot plot suggests fewer cuts in 2025 and 2026
While the rate cut was widely anticipated, stocks were falling on Wednesday afternoon. All of the major indexes dropped about 1% with the Nasdaq off 235 points, the Dow down 387 points, the S&P 500 dropping 62 points, and the Russell 2000 down 25 points.
The reason was the release of the Summary of Projections, or dot plot, which called for fewer rates cuts in 2025 and 2026 than previously anticipated.
The December dot plot suggests that the federal funds rate would be at 3.9% at the end of 2025, which would indicate potentially two cuts in 2025.
The September dot plot had the rate at 3.4%, suggesting four cuts.
For 2026, the consensus called for the the federal funds rate to be 3.4% at the end of year, which would be another two cuts in 2026. The September projections had the rate at 2.9% by the end of 2026.
Finally, the consensus set a 3.1% target for rates by the end of 2027, compared to the previous projection of 2.9%.
The dot plot is not set in stone and it changes from quarter to quarter based on current and expected conditions. But the market clearly saw the projected slowing of rate cuts as a potential negative development for stocks.
