What's New
The Dow Jones Industrial Average, one of the three U.S. stock indexes, plummeted a little over 1,100 points after the Federal Reserve on Wednesday suggested it would cut interest rates just twice next year, rather than the four times estimated in September.
Why It Matters
The Fed's benchmark interest rate, known as the federal funds rate, is the target interest rate at which commercial banks borrow and lend their extra reserves to one another overnight. If the federal funds rate continues to decrease, the cost of consumer borrowing—including mortgages, auto loans and credit cards—should go down over time.
U.S. stock indexes like the Dow Jones measure how the market is performing. If stocks are down, it signals trouble within the nation's economy.
What To Know
The Dow Jones dropped 1,123 points (or 2.6 percent) by the close of the market Wednesday after the Fed's 19 policymakers projected that the central bank will cut interest rates by a quarter-point just twice next year, meaning rates will only be sliced by a half a percentage point in total throughout next year.
The federal funds rate was raised by the Fed 11 times in 2022 and 2023 to curb high inflation, which hit both the United States and countries around the world after the COVID-19 pandemic. As inflation in the U.S. cooled, the Fed cut rates twice, once in September and once in November, before slicing them for a third time this year on Wednesday. In total, the Fed cut rates in 2024 by a full percentage point.
The other two stock indexes also saw sharp decreases with the S&P 500 dropping 2.9 percent and the Nasdaq composite falling 3.6 percent.
What People Are Saying
Federal Reserve Chairman Jerome Powell said during a Wednesday press conference that some Fed officials are already trying to factor in uncertainties associated with the transition of a new administration. President-elect Donald Trump will be inaugurated on January 20. There have been increasing concerns on Wall Street that Trump's preference for tariffs and other policies could further grow inflation. On the other hand, his policies could also potentially spark economic growth, according to those on Wall Street.
"When the path is uncertain, you go a little slower," Powell said, adding that it is "not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down."
Powell also pointed to how the job market is performing and how recent inflation readings as to why the Fed is looking to slow down their rate cuts.
"In the labor market conditions remain solid. Payroll job gains have slowed from earlier in the year, averaging 173,000 per month over the past three months, the unemployment rate is higher than it was a year ago, but at 4.2 percent in November, it has remained low," Powell said when announcing Wednesday's rate cuts.
He added: "Inflation has eased significantly over the past two years, but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the Consumer Price Index and other data indicate that total PCE [Personal Consumption Expenditures] prices rose 2.5 percent over the 12 months, ending in November and that, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent."
This article includes reporting from The Associated Press.
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