As Fed Rate Cut Hopes Fade for 2025, the Dow Has Its Worst Start Since 2016

U.S. stocks are off to a rough start in 2025, with the Dow Jones Industrial Average recording its worst opening stretch to a year since 2016. On Friday, market movements reflected growing sentiment that the Federal Reserve might hold off on cutting interest rates at least until May.

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The Dow dropped nearly 700 points on Friday, marking consecutive weekly losses. The index is down 1.4% in January so far, making this its weakest performance over the first six trading days of a year since 2016, when it plunged 5.9%, according to Dow Jones Market Data.

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Stocks broadly came under pressure after a stronger-than-expected jobs report led to a spike in Treasury yields. The report revealed that the U.S. economy added more jobs in December than Wall Street had anticipated, while the unemployment rate dipped. This prompted traders in the federal funds futures market to price in an increased likelihood that the Fed will keep its benchmark interest rate steady during its January and March meetings.

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Neil Dutta, head of economic research at Renaissance Macro Research, noted in a Friday report that the robust employment figures, despite elevated interest rates, are fueling speculation about higher “neutral” rates. He explained that the markets are responding accordingly, with rates rising, the dollar strengthening, and stocks declining. The result is an expectation of just one rate cut in 2025.

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The major U.S. stock indexes closed sharply lower on Friday. Both the Dow and the Nasdaq Composite fell 1.6%, while the S&P 500 dropped 1.5%.

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The S&P 500 saw most of its sectors finish in negative territory on Friday. The index has lost 0.9% so far in 2025, marking its worst six-day start to a year since 2022. Particularly hard-hit has been the S&P 500’s real estate sector, which fell 2.5% on Friday, deepening its year-to-date loss to 3.8%.

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In the bond market, rates surged on Friday. The yield on the 10-year Treasury note jumped to 4.772%, its highest level since November 1, 2023, according to Dow Jones Market Data.

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While the strong jobs report is a positive economic signal, it solidified the expectation that the Fed is unlikely to cut rates in the near term, said Kevin Gordon, senior investment strategist at Charles Schwab, in an interview.

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Traders in the federal funds futures market are nearly certain that the Fed will keep its benchmark rate unchanged at its January meeting, with the target range staying between 4.25% and 4.5%, according to CME’s FedWatch Tool. Following the release of the jobs report, traders also assigned a 75% probability that the Fed will remain on pause in March, up from 59% earlier that morning.

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As of Friday’s market close, CME data suggested a 55.6% chance that the Fed could cut its policy rate by a quarter percentage point in May.

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Despite the stock market’s struggles on Friday, Gordon believes that the Fed maintaining its current policy due to a resilient economy and labor market is ultimately a positive sign for risk assets.

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Friday’s employment report showed that the U.S. added 256,000 jobs in December, with the unemployment rate slightly declining to 4.1%. While inflation concerns triggered a negative market reaction, Gordon argued the response may have been somewhat exaggerated. He noted that wage growth slowed in December, which could ease inflationary pressures.

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However, he warned that if next week’s inflation data exceeds expectations, the U.S. stock market could face a more prolonged decline.

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Most sectors of the S&P 500 have posted losses so far in 2025. After real estate, consumer staples and financials have experienced the next-largest declines, with both sectors down more than 2% this month, according to FactSet data. Information technology, the index’s largest sector, recorded the fourth-largest year-to-date losses, falling 1.7%.

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Meanwhile, the Cboe Volatility Index, also known as Wall Street’s “fear gauge,” has climbed in 2025. Trading under the ticker symbol VIX, the index is up 12.6% so far this year, closing at 19.54 on Friday.

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Citigroup analysts cautioned in a Friday research note that investors should be more selective, as elevated market volatility is likely to persist.

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