Stocks and Bonds Slumped After the Fed Met and Market Volatility Soared

Stocks and bonds experienced sharp declines following the Federal Reserve's policy meeting on Wednesday, as newly released economic projections hinted at a slower pace of interest rate reductions next year. The updated outlook rattled markets, with Treasury yields surging and signaling potential challenges ahead.

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Treasury yields climbed after the Fed's announcement, driven by projections that inflation might remain persistent through 2025. This spurred significant volatility across markets. The Cboe Volatility Index (VIX), often referred to as the stock market’s “fear gauge,” soared 74% to reach 27.6, its highest level in months, according to data.

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The market reaction was stark. The Dow Jones Industrial Average plunged 2.6%, while the S&P 500 dropped 2.9%, and the Nasdaq Composite slid a more pronounced 3.6%. Bond prices also fell, with longer-duration assets experiencing the most substantial declines as rising yields exerted downward pressure.

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As investors brace for heightened market turbulence in 2025, uncertainties surrounding new policies under the incoming Trump administration add to the mix. Concerns about potential tariffs and their economic impact were raised during Fed Chair Jerome Powell’s press conference. Powell emphasized the Fed’s efforts to understand how tariffs might influence inflation, cautioning that the lack of policy details makes it premature to draw definitive conclusions. "We just don’t know very much at all about the actual policies," Powell stated. "We don’t know what will be tariffed, from what countries, for how long, or in what size."

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The Fed’s decision to reduce its benchmark interest rate by 0.25 percentage points to a target range of 4.25% to 4.5% was accompanied by a cautious tone. Powell highlighted the ongoing risks posed by inflation and the complexities of managing monetary policy under these conditions.

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According to Charlie Ripley, a senior investment strategist at Allianz Investment Management, the Fed’s primary message was clear: inflation risks remain elevated. "The Fed has managed 100 basis points of cuts so far in this cycle, but with the economy’s trajectory and recent inflation uptick, it will be challenging for the Fed to justify further cuts at the same pace," Ripley noted in emailed comments.

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The Federal Reserve’s Summary of Economic Projections, released Wednesday, revealed a notable shift in expectations. Officials now anticipate just two quarter-point rate cuts in 2025, down from four projected in September. This revision reflects concerns over inflation's trajectory and the broader economic outlook.

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Bond markets, particularly longer-term Treasurys, have faced heightened volatility this year. Longer-duration bonds are more sensitive to interest rate changes, and this sensitivity was evident in Wednesday’s trading. The Vanguard Total Bond Market ETF and iShares Core U.S. Aggregate Bond ETF, both popular investment-grade fixed-income ETFs, each declined by 0.8%, trimming their year-to-date returns to 1.4%, according to FactSet. Meanwhile, the iShares 20+ Year Treasury Bond ETF dropped over 1%, deepening its annual loss to 6.1%. In contrast, shorter-duration bonds fared slightly better, with the iShares 1-3 Year Treasury Bond ETF falling just 0.2%.

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The Fed's updated projections suggest inflation could end 2025 at 2.5%, higher than its previous forecast of 2.1% in September. Inflation, as measured by the personal-consumption-expenditures price index, rose 2.3% in the 12 months through October, underscoring the challenges the Fed faces in achieving its 2% target.

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The outcome of the meeting sent ripple effects across markets. Treasury yields and the U.S. dollar both climbed. The yield on the 10-year Treasury note rose 10.9 basis points to 4.493%, the highest level since May, according to Dow Jones Market Data.

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Preston Caldwell, chief U.S. economist at Morningstar, described the Fed’s stance as preparing for limited or potentially no additional rate cuts in 2025 and beyond. "The Fed is setting the stage for the possibility of few (or even zero) additional rate cuts in 2025 and 2026," Caldwell said in emailed comments.

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While the Fed began cutting rates in September after an aggressive series of hikes aimed at taming inflation, its cautious approach reflects concerns about a potential resurgence in price pressures. The path forward will likely depend on incoming economic data and evolving global conditions. Market participants are now left grappling with the implications of a slower easing cycle, heightened volatility, and the uncertain interplay between monetary policy and broader economic forces.

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