Only one rate cut next year? The Federal Reserve suddenly releases hawkish signals, causing Wall Street to fall into panic

The Zhitong Finance APP noted that the Federal Reserve lowered interest rates by 25 basis points as expected on Wednesday, but this did not prevent investors from selling off risk assets in large numbers.

On Wednesday, the Federal Reserve announced a 25 basis point cut to its key interest rate, marking the third consecutive rate cut, while signaling a cautious approach to future rate cuts over the next few years. Federal Reserve Chairman Jerome Powell stated that as long as inflation remains above the 2% target, the central bank may pause further rate cuts, leading to a significant drop in the stock market at the end of the trading session.

The S&P 500 index rose slightly before the announcement of the rate cut but then plummeted by 3%, marking the worst "Fed Day" since March 2020, when the Federal Reserve made an emergency rate cut over a weekend in response to the COVID-19 pandemic. Fewer than 20 benchmark stocks closed higher. Small-cap stocks experienced the most severe risk-off behavior, with the Russell 2000 index falling by 4.4%, the largest drop since June 2022.

In response to this news, U.S. Treasury yields surged, marking the most hawkish move by the Federal Reserve since the taper tantrum in 2013. Panic swept across the market, with the Chicago Board Options Exchange Volatility Index (VIX) soaring to 28, the highest level since the volatility shock in August.

Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, stated that the rate cut was not surprising. The nearly 100% probability of a rate cut had already been priced in by the market. However, I think there is some concern about the wording in the news. It's not just the data, but also the policy measures of the incoming government. The market had originally expected two to three rate cuts next year, leaning more towards three cuts. Now it seems that the number of cuts should be less than two. The market is considering some things that it should have known but has not fully digested yet. I think this is a bit of an overreaction, an unconscious response to things that should have been known. The market is not shocked by the indication of only one rate cut next year. So it seems a bit excessive.

Jamie Cox, Managing Partner at Harris Financial Group, believes that "the stock market was already out of control before this meeting, and this is a good way to get some people to exit before the holidays. Stock prices are expensive—especially tech stocks—so people will quickly sell off and lock in profits before the holidays. The rate decision was just a catalyst for people to do what they would have done anyway—sell early and cash out after a stellar year in the stock market."

Michael O’Rourke, Chief Market Strategist at Jonestrading, stated that the entire federal funds curve has moved higher. You can see this in both the two-year and ten-year yields. The surge in yields will only put more pressure on risk assets. Of course, we have not factored in any concerns about a more hawkish rate outlook; the market has been soaring. This indicates that there is a good reason to sell off some chips before the end of the year. This is a reason for profit-taking. The stocks that have risen the most will feel the most pain in the short term.

Jim Awad, Senior Managing Director at Clearstead Advisors, stated, "Now, expectations for rate cuts next year are rapidly diminishing. The market seems to believe there will only be one rate cut next year, which means inflation will remain high for a long time, and interest rates will stay elevated for an extended period, all of which will harm stock valuationsAs financing costs rise, the deficit problem will become more severe. Overall, this is a major negative for risk assets, causing panic in the market."

Chris Zaccarelli, Chief Investment Officer of Northlight Asset Management, believes that the Federal Reserve is trying to meet market demands, but this gift has not been well received. The market is forward-looking, ignoring today's 25 basis point rate cut and instead focusing on the fact that there will be no rate cuts next year. The Federal Reserve only expects to cut rates twice, which is much less than the market's expectations, and investors are clearly dissatisfied with future rate expectations.

Steve Sosnick, Chief Strategist at Interactive Brokers, stated, "What interests me most is the bond reaction. I don't know why fixed income traders would be surprised by a 9-12 basis point rate cut unless they are very frustrated with the possibility of further cuts. Then the rise in rates strengthens the dollar, and a stronger dollar hits multinational companies. Look at the VIX. That jump screams 'I need protection now!'"