Fed Rate Cut Triggers Massive US Stock Market Plunge: Dow, Nasdaq, S&P 500 All Plummet, Crypto Market Devastated

Fed Rate Cut Triggers Massive US Stock Market Plunge: Dow, Nasdaq, S&P 500 All Plummet, Crypto Market DevastatedOn December 18, 2023, the US stock market experienced a significant sell-off, with all three major indices closing sharply lower, sending shockwaves through the market. The Dow Jones Industrial Average plummeted 1123

Fed Rate Cut Triggers Massive US Stock Market Plunge: Dow, Nasdaq, S&P 500 All Plummet, Crypto Market Devastated

On December 18, 2023, the US stock market experienced a significant sell-off, with all three major indices closing sharply lower, sending shockwaves through the market. The Dow Jones Industrial Average plummeted 1123.03 points, or 2.58%, closing at 42326.87; the Nasdaq Composite fell 716.37 points, or 3.56%, closing at 19392.69; and the S&P 500 dropped 178.45 points, or 2.95%, closing at 5872.16. This marked the S&P 500's largest single-day drop in over four months, the Nasdaq's biggest one-day decline in nearly five months, and the Dow's tenth consecutive day of losses, its longest losing streak since October 1974. The VIX volatility index surged as high as 78% intraday, eventually closing at 28.32.

This market crash followed the Federal Reserve's announcement of a 25-basis-point cut to the federal funds rate target range, bringing it to 4.25%4.50%. While the rate cut was interpreted as a response to economic slowdown, Fed Chair Jerome Powell stated in a press conference that the Fed is nearing a point where it will slow the pace of rate cuts, with future decisions becoming more data-dependent. Powell emphasized that the Fed's policy stance has already significantly eased and that future adjustments will be more cautious.

The Fed's statement projected a further 50-basis-point rate cut to 3.9% in 2025 and another 50-basis-point cut to 3.4% in 2026. The Fed's dot plot indicated two 25-basis-point rate cuts are likely in 2025. Powell stated that the current high-rate expectation is consistent with inflation expectations and that a rate hike next year "seems unlikely." He further indicated the Fed is entering a new phase of rate adjustments, with future cuts contingent upon evolving economic data.

On inflation, the Fed raised its median projection for Personal Consumption Expenditures (PCE) inflation in 2025 to 2.5%, up from 2.1% in September. Inflation projections for 2024-2026 were adjusted, with core PCE inflation median projections of 2.8%, 2.5%, and 2.2%, respectively. Powell acknowledged that reaching the 2% inflation target remains challenging but asserted that the Fed believes inflation is approaching that target. He also stated that further cooling of the labor market isn't needed to achieve this goal. Despite acknowledging higher risks and uncertainty surrounding inflation, Powell maintained that the Fed must continue restrictive policies until inflation falls to the 2% target.

The Fed's economic projections show median US GDP growth rates of 2.5%, 2.1%, and 2.0% for the end of 2024, 2025, and 2026, respectively. Powell noted that the US economy is performing strongly, with growth in the second half of 2024 exceeding expectations, and no signs of increased recession risk. He also remarked that the current labor market conditions are more relaxed than in 2019. While acknowledging significant uncertainty, Powell expressed overall optimism about the economic outlook, projecting continued growth over the next three years, with unemployment rate median projections of 4.2%, 4.3%, and 4.3% for 2024, 2025, and 2026.

The Fed also announced it would lower the overnight reverse repurchase rate from 4.55% to 4.25% and the discount rate from 4.75% to 4.50%. Furthermore, the FOMC statement maintained the Treasury securities reduction cap at $25 billion and the MBS reduction cap at $35 billion. Powell emphasized these adjustments wouldn't alter the overall policy stance.

Elsewhere, Powell mentioned continued weakness in real estate activity and resilient consumer spending. He noted ongoing discussions regarding the potential inflationary impact of tariffs but stated no conclusions had been reached. Geopolitical instability remains a risk factor of concern for the Fed. When questioned about Bitcoin reserves, Powell stated the Fed isn't permitted to own Bitcoin and isn't seeking to change existing laws.

Looking ahead, despite economic and inflationary uncertainties, Powell and other Fed officials indicated future monetary policy will be more data-driven, especially regarding the timing and magnitude of rate cuts. In summary, the Fed's monetary policy is gradually entering a new phase, with a slower pace of rate adjustments. Economic and inflation developments over the coming years will be crucial in shaping future policy adjustments. US interest rate futures priced in over a 90% probability of the Fed holding rates steady in January, up from 81% before the announcement. Nick Timiraos, a Fed whisperer, noted the addition of the phrase "magnitude and timing" in the Feds statement, signaling a slower pace of rate cuts to refine potential adjustments. Goldman Sachs Asset Management's Whitney Watson predicts the Fed will skip a rate cut in January and resume easing in March.

In other markets, the US dollar index surged, rising 1.00% to close at 108.024. The euro fell to 1.0376 against the dollar, and the British pound fell to 1.2593. Oil prices rose, with WTI crude closing at $70.58 (+0.71%) and Brent crude at $73.39 (+0.27%). US Treasury yields rose following the Fed's announcement, while gold and silver prices fell sharply. Bitcoin's price fell significantly, breaking below $10,100 and dropping over 5% in 24 hours. Coinglass data showed over 250,000 liquidations totaling $697 million across the cryptocurrency market in the past 24 hours.

All eleven sectors of the S&P 500 closed lower, with widespread declines in technology and financial stocks. The Consumer Discretionary sector led the declines, falling 4.74%, followed by Real Estate (nearly 4%), Communication Services and Financials (over 3%). Major tech stocks suffered significant losses: Tesla (-8%+), Broadcom (-7%+), Intel (-5%+), AMD, Amazon, Arm, Micron (-4%+), Microsoft, Meta, Google, Netflix, Qualcomm (-3%+), and Nvidia, TSMC, Oracle, ASML, Apple (-2%+) Apple (-2.14%), which reportedly paused its iPhone hardware subscription program. Microsoft (-3.76%), as OpenAI launched a new ChatGPT interaction format. Arm (-4.37%), Qualcomm (-3.08%), engaged in a heated debate over intellectual property rights. Amazon (-4.60%), as some employee return-to-office dates were delayed due to insufficient office space. Financials fell across the board, with regional banks and Morgan Stanley dropping over 5%. Energy stocks also declined, with Devon Energy and Petrobras falling more than 5%. Most Chinese ADRs also closed lower, with the Nasdaq Golden Dragon China Index down 2.41%.

In conclusion, the Fed's rate cut decision and Powell's statement regarding a slower pace of future cuts fuelled market concerns about the economic outlook and inflation, triggering a US stock market plunge and impacting the cryptocurrency market and other global markets. This underscores the significant uncertainty in global economic and financial markets and the sensitivity to Fed policy decisions. Future market movements will largely depend on incoming economic data and subsequent Fed policy adjustments.