Federal Reserve Chairman Jerome Powell took an aggressive stance during Wednesday’s news conference after the Fed’s December meeting, sparking a butchery in the markets as the New York session headed toward the close .
Although the Federal Reserve cut interest rates by 0.25% to a range of 4.25%-4.5%, as widely expected, updated economic projections suggest only two potential rate cuts in 2025 – compared to four planned in September and fewer than the three anticipated by the markets before the meeting.
Powell described the shift as “a new phase” for monetary policy, noting that after 100 basis points of rate cuts in 2024, rates are now significantly closer to a neutral position.
Stocks fell across the board, the U.S. dollar hit a two-year high and Bitcoin (CRYPTO:BTC) fell more than 5%, investors are digesting the reality of a change in the Federal Reserve’s stance on monetary policy.
The CBOE Volatility Index, also known as the VIX and dubbed by some as “Wall Street’s fear gauge,” soared 58% to 25, reflecting rising investor uncertainty and heightened anxiety about the future of interest rates.
Rout on Wall Street: the main indices fall
The Dow Jones, followed by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), lost 1,123 points, down 2.6% to close at 42,326, marking its worst one-day fall since September 2022. Amazon.com Inc. (NASDAQ:AMZN) had the worst performance among the star stocks, falling 4.6%.
The S&P 500 index, followed by the SPDR S&P 500 ETF Trust (NYSE:SPY), fell 178 points, or 2.9% to 5,872, also marking its worst day since September 2022. Paycom Software Inc. (NYSE: PAYC) was the biggest loser in the S&P 500, falling 10%.
The technology-heavy Nasdaq 100, followed by the Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), saw an even steeper decline of 3.6%, closing at 21,209, as interest-rate-sensitive technology stocks took a beating. Tesla Inc. (NASDAQ:TSLA) fell 8.1%, the worst performer on the Nasdaq 100.
Each of the Magnificent Seven companies closed in the red, collectively wiping out more than $600 billion in market capitalization on Wednesday.
Small-cap stocks in the Russell 2000 index saw the biggest losses, falling 4.7% to 2,225. With today’s move, the iShares Russell 2000 ETF (NASDAQ:IWM) has completely erased the post-election rebound.
All major US equity sectors finished in the red.
Consumer discretionary stocks suffered the most, falling 4.5%, followed by real estate, which fell 4%, as rate hikes negatively impacted growth and rate-oriented industries of interest.
Technology, the largest sector by market capitalization, fell 3.2%, with semiconductor makers and software companies worst hit by the stock selloff.
Communications and materials both fell 2.9%, while the financial sector fell 3%, reflecting pressure on cyclical sectors of the market.
Even defensive sectors did not escape the massive stock sell-off. Utilities fell 2.4% and consumer staples fell 1.5%.
US Dollar Hits Two-Year High, Knocks Down Gold, Bitcoin
The US dollar was the winner of the day, with the US Dollar Index (DXY) followed by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), rising 1.2% to its highest level since November 2022.
As the dollar climbed, gold failed to provide a safe haven, falling 2.1% to $2,580 an ounce, while silver lost 3.5%.
Alternative assets saw renewed risk-taking sentiment. Bitcoin fell 5.5%, trading just above $101,500.
Bitcoin fell 5.5%, just above $101,500, as the digital asset is increasingly seen as a risky asset by investors.
During the press conference, Powell was asked whether the US government should consider establishing a strategic reserve of Bitcoin. Powell quickly dismissed the idea, clarifying that such a move is not on the Fed’s agenda.
“We are not allowed to own Bitcoin,” Powell said, pointing to the Federal Reserve’s legal and structural limitations. “The Federal Reserve Act governs what we can own, and we are not seeking to change it in any way.”
Cryptocurrency advocates will have to turn to other assets, alone or in combination with Bitcoin, to compensate for this loss.
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