Federal Reserve Sparks Market Rout: Wall Street Experiences Plunge, Dollar Rises to Two-Year Highs, and Treasury Yields Spike. In a recent statement, Chairman Jerome Powell adopted a hawkish tone, emphasizing inflation risks and cautioning against aggressive rate cuts in the near future. Following his remarks, Bitcoin dropped by 5% after Powell dismissed the creation of a US government-backed cryptocurrency reserve.
The December Federal Reserve meeting took markets by surprise, delivering a jolt of volatility right before the holiday season. Instead of the anticipated rate cuts, investors were met with a cautious outlook from Powell. The Federal Open Market Committee (FOMC) decided on a 25-basis-point cut, bringing the target range down to 4.25%-4.50%.
However, the updated economic projections failed to inspire optimism. The central bank revised its forecasts, now only expecting two additional rate cuts in 2025, a significant reduction from the four cuts previously anticipated in September.
During the press conference, Powell commented, “From here, it’s a new phase, and we’re going to be cautious about further cuts.” He also stated, “We’re significantly closer to neutral,” referencing the interest rate that aims neither to promote nor to restrict economic growth.
Powell projected an optimistic view of the US economy, highlighting its resilience and noting its comparatively strong performance against struggling global counterparts. “When we attend international meetings, the story is how well the US economy is doing,” he remarked.
When addressing recession concerns, Powell downplayed the likelihood of an immediate downturn, stating, “Most forecasters have been predicting a slowdown in growth for a very long time, and it keeps not happening.”
Fresh Inflation Concerns Highlighted by the Fed
Hotter inflation forecasts have prompted the Fed’s recalibrated stance. The expected headline inflation for 2025 is now 2.5%, up from 2.1%, and core inflation—excluding food and energy—is also adjusted to 2.5%, up from the previous 2.2%.
Powell reiterated the Fed’s commitment to achieving its 2% inflation target, though he acknowledged it might take “another year or two” to reach this goal. When queried about potential rate hikes in 2025, he stated, “You don’t rule things completely in or out in this world. That doesn’t appear to be a likely outcome.”
The focus, he mentioned, is on monitoring progress regarding inflation and labor market strength, underscoring the Fed’s approach grounded in data.
Powell also answered questions regarding fiscal risks under a prospective Trump administration and the inflationary impacts of tariffs, emphasizing that the Fed remains vigilant without making definitive policy assumptions. “We’re in the phase of monitoring potential outcomes, not making policy assumptions,” he said.
Market Reaction: Stocks Fall, Dollar Rises
Following Powell’s remarks, the S&P 500 fell 3.03% to 5,866.80, with the Nasdaq 100 plunging 3.74% and the Dow Jones dropping 1,103 points (-2.54%). The tech sector was particularly hard-hit, led by a notable 8.1% decline in Tesla Inc.
This marked the most significant decline for both the S&P 500 and the Dow since September 2022. Wall Street’s CBOE Volatility Index, which is often referred to as the ‘fear gauge’, surged nearly 60%, indicating increasing investor anxiety after Powell dispelled notions of imminent policy easing.
The euro fell 1.33% against the dollar, reaching $1.03518, a level not seen since November 2022, while the dollar index (DXY) jumped 1.22% to 108.265, marking a two-year high. Commodities faced pressure as well, with gold dropping 2.3% to $2,584 and silver declining by 3.9% to a five-week low.
Treasury yields also rose significantly, as investors reassessed the landscape for interest rate cuts. The yield on the 10-year Treasury climbed by 12 basis points, reaching 4.52%, the highest level since late May.
Bitcoin Dips After Powell Rules Out Crypto Reserve
Regarding speculation around Bitcoin and government-backed cryptocurrency reserves, Powell dismissed the proposal, stating, “We’re not allowed to own Bitcoin,” citing constraints under the Federal Reserve Act. “We have no intention of pursuing changes to that law,” he added.
As a result of Powell’s comments, Bitcoin saw a decline of over 5%, trading at approximately $100,000, exacerbating strains in the cryptocurrency market.
Photo credit & article inspired by: Euronews
