MW Why stocks and bonds slumped - and market volatility soared - after Fed meeting
By Christine Idzelis
The stock market's fear gauge surged on Wednesday
Stocks and bonds sold off after the Federal Reserve ended its policy meeting Wednesday with a new set of economic projections that pointed to a potentially slower pace of interest-rate cuts next year than previously forecast.
Markets were rocked by a jump in Treasury yields following the Fed meeting, with interest rates in the bond market climbing after the economic projections also showed central-bank officials anticipate that inflation may remain sticky in 2025. The Cboe Volatility Index VIX, the stock market's so-called fear gauge, skyrocketed 74% Wednesday to 27.6, according to FactSet data.
The Dow Jones Industrial Average DJIA ended Wednesday with a 2.6% drop, the S&P 500 SPX slumped 2.9% and the technology-heavy Nasdaq Composite COMP plunged 3.6%. Wednesday's surge in Treasury yields sent bond prices lower, with sharper drops in assets with longer durations.
Investors are bracing for more market volatility in 2025 as they await details on new policies under the incoming Trump administration. Some fear the potential for more tariffs could lead to a global trade war, a subject that came up during Fed Chair Jerome Powell's press conference Wednesday.
Powell indicated that the Fed has been working to understand how tariffs could affect inflation in the economy, so that it's prepared to make a "thoughtful assessment" about how to potentially respond as policy details emerge.
"We just don't know really very much at all about the actual policies, so it's very premature to try to make any kind of conclusion," Powell said during his press briefing after the Fed concluded its policy meeting. For example, "we don't know what will be tariffed, from what countries, for how long, in what size," he explained. "We don't know whether there'll be retaliatory tariffs."
The Fed began cutting rates in September, after hiking them aggressively to lower inflation.
"The main takeaway from today's Fed meeting was that inflation risks are back, and the Fed is clearly concerned," said Charlie Ripley, a senior investment strategist for Allianz Investment Management, in emailed comments Wednesday. "The Fed has been able to maneuver 100 basis points of cuts so far in this cycle but given the trajectory of the economy and the recent uptick of inflation, it is going to be more difficult for the Fed to provide basis to continue cutting rates at the same pace."
The Federal Reserve's Summary of Economic Projections - released at 2 p.m. Eastern time on Wednesday - showed Fed officials are now penciling potentially two rate cuts of a quarter-point each in 2025. That's down from four such cuts forecast in September.
Longer-term Treasurys have been more volatile this year than bonds with shorter duration. Duration is a measure of sensitivity to changes in interest rates.
The Vanguard Total Bond Market ETF BND and iShares Core U.S. Aggregate Bond ETF AGG - popular exchange-traded funds that provide broad exposure to the investment-grade U.S. fixed-income market - each dropped 0.8% on Wednesday to pare their 2024 total returns to 1.4%, according to FactSet data.
The iShares 20+ Year Treasury Bond ETF TLT closed Wednesday with a steeper drop surpassing 1%, deepening its loss so far this year to 6.1% on a total-return basis, FactSet data show. The shorter-duration iShares 1-3 Year Treasury Bond ETF SHY fell a more modest 0.2% Wednesday.
The Fed said Wednesday that it decided to lower its benchmark rate by a quarter of a percentage point to a target range of 4.25% to 4.5%, while still aiming to bring inflation down to its 2% target. Its latest Summary of Economic Projections showed central-bank officials see inflation potentially ending 2025 at 2.5%, which is above their previous forecast of 2.1% in September.
Inflation, as measured by the personal-consumption-expenditures price index, rose 2.3% in the 12 months through October.
Read: After Fed's 'hawkish' forecasts, fed-fund futures point to pause in rate cuts in January
The outcome of the Fed's policy meeting sent both the U.S. dollar DXY and Treasury bond rates higher. The yield on the 10-year Treasury note BX:TMUBMUSD10Y jumped 10.9 basis points to 4.493%, its highest level since May 31 based on 3 p.m. Eastern time yields, according to Dow Jones Market Data.
"The Fed is setting the stage for the possibility of few (or even zero) additional rate cuts in 2025 and 2026," said Preston Caldwell, chief U.S. economist at Morningstar, in emailed comments Wednesday.
Greg Robb contributed to this report.
-Christine Idzelis
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(END) Dow Jones Newswires
December 18, 2024 19:16 ET (00:16 GMT)
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