Fed sparks market rout: Wall Street plunged, the dollar hit two-year highs, and Treasury yields spiked as Powell struck a hawkish tone, warning of inflation risks and cautious rate cuts ahead. Bitcoin slid 5% after Powell ruled out a US crypto reserve tool.
The December Federal Reserve meeting knocked the wind out of markets, delivering exactly what investors didn’t ask for this holiday season: more volatility, fewer rate cuts ahead, and hawkish posture from Jerome Powell.
The Federal Open Market Committee, as widely expected, delivered a 25-basis-point rate cut, bringing the target range to 4.25%-4.50%.
Yet, the updated economic projections left little room for market cheer. The central bank now anticipates just two additional cuts in 2025, a dramatic shift from the four cuts projected in September.
During the press conference, Powell added fuel to the fire: “From here, it’s a new phase, and we’re going to be cautious about further cuts.”
“We’re significantly closer to neutral,” Powell said, referring to the interest rate level that neither fuels nor stifles economic growth.
Powell struck an optimistic tone about the current state of the US economy, describing it as resilient, highlighting a “remarkable” performance compared to global peers which are struggling with sluggish growth and high inflation.
“When we attend international meetings, the story is how well the US economy is doing,” he said.
When asked about recession risks, Powell dismissed the idea of an imminent downturn. “Most forecasters have been predicting a slowdown in growth for a very long time, and it keeps not happening,” he added.
Fed highlights fresh inflation fears
Driving this recalibrated stance are hotter inflation forecasts. Headline inflation for 2025 is now expected to hit 2.5%, up from 2.1%, while core inflation—excluding food and energy—is also seen at 2.5%, up from the previously 2.2%.
Powell reiterated the Fed’s resolve to achieve its 2% target, though he conceded it might take “another year or two.”
When asked whether the Fed might consider raising rates again in 2025, Powell said, “You don’t rule things completely in or out in this world. That doesn’t appear to be a likely outcome.”
“Our focus is on seeing further progress on inflation and continued strength in the labour market,” Powell said, highlighting the Fed’s data-driven approach.
Powell also addressed questions on fiscal risks under a potential Trump administration and the inflationary fallout of tariffs. While refusing to make assumptions, Powell acknowledged the Fed is keeping a close eye on these developments:
“We’re in the phase of monitoring potential outcomes, not making policy assumptions.”
Stocks fall, dollar surges to 2-year highs
The S&P 500 plunged 3.03% to 5,866.80, while the Nasdaq 100 sank 3.74% and the Dow Jones dropped 1,103 points (-2.54%) in a broad market rout. Tesla Inc. led the sell-off in the tech sector, tumbling 8.1%.
For the S&P 500 and the Dow, Wednesday’s session marked their steepest declines since September 2022.
Wall Street’s CBOE Volatility Index, often dubbed the ‘fear gauge,’ spiked nearly 60%, reflecting mounting investor anxiety as Fed Chair Jerome Powell dismissed expectations for imminent policy easing.
The euro slid 1.33% against the dollar to $1.03518, its weakest level since November 2022, while the dollar index (DXY) surged 1.22% to 108.265, a two-year peak.
Commodities also felt the pressure: gold fell 2.3% to $2,584, and silver tumbled 3.9%, touching a five-week low.
Treasury yields jumped as investors reassessed the outlook for interest rate cuts. The 10-year Treasury yield climbed 12 basis points to 4.52%, the highest since late May.
Bitcoin stumbles as Powell rules out crypto reserve
Addressing speculation over Bitcoin and crypto reserves, Powell rejected the idea of a US government-backed Bitcoin strategic reserve tool.
“We’re not allowed to own Bitcoin,” Powell clarified, citing legal constraints under the Federal Reserve Act. “We have no intention of pursuing changes to that law.”
Bitcoin slid more than 5% to approximately $100,000 in the wake of Powell’s remarks, adding further strain to the cryptocurrency market