Although the Federal Reserve's "hawkish cut" on Thursday had been broadly expected, markets now fear 4% policy rates will be the floor for the coming year at least — and no further easing until midyear or later.
The picture painted by the Fed removes monetary easing as tailwind from the stock market for months and has seen the dollar rocket to its highest in more than two years — bowling over emerging, developed and crypto currencies alike.
Lifting their median inflation forecast for next year by 0.3 percentage point to 2.5% but only nudging the GDP growth up a tenth to 2.1%, Fed policymakers also raised their policy rate forecasts for the next two years by half a point to 3.9% and 3.4% respectively.
And they lifted the longer-term horizon too, with projections for the long-term neutral rate nudged up to 3% for the first time since 2018.
"It's a new phase and we're going to be cautious about further cuts," Chair Jerome Powell said after the Fed announced the widely expected quarter-point cut into a 4.25-4.50% range.
Markets took the cue and futures now don't fully price another quarter-point reduction until June at the earliest — and doubt there'll be any more over the rest of the year.
Already aggravated Treasuries got whacked again, with 10-year and 30-year yields vaulting 4.5% and 4.7% respectively to hit their highest since May. The 2-10 year yield curve steepened to its highest in three months.
Compounding the angst, debt ceiling worries crept back onto the radar. President-elect Donald Trump on Wednesday disrupted bipartisan efforts to avert a government shutdown as he pressured his Republicans in Congress to reject a stopgap bill to keep the government funded past the end of the week.
The cocktail of events left no Christmas cheer for an historically expensive stock market that's already seen momentum slowing and is increasingly fearful of investors' almost-unchallenged bullishness for 2025. Some now suggest most of the positive post-election fiscal and economic scenario as well as the U.S. 'exceptionalism' theme is already in the price.
The benchmark S&P500 and blue-chip Dow Jones indexes saw their biggest one-day percentage decline since early August and the Nasdaq clocked its biggest drop since July. The small cap Russell 2000 dropped 4.4%, its biggest drop since June 2022.
Even though it's still up 12% for 2024 to date, the Dow suffered its 10th straight session of declines — the longest streak of daily losses since 1974.
And adding to the wobble in tech, shares in Idaho-based Micron Technology plunged 15% after the bell after it missed quarterly revenue and profit estimates as weak demand for consumer products such as personal computers and smartphones hit the chipmaker's business.
Casting a pall over the yearend, the VIX volatility gauge jumped 11.75 points to close at a four-month high of 27.62 — although it subsided again closer to 20 overnight.
Stock futures are also attempting to claw back some of the losses on Thursday.
But the Fed was just the headline central bank in a stream of other yearend policy decisions around the world.
Japan's yen skidded to its weakest since July against the pumped-up dollar after the Bank of Japan kept its rates unchanged and offered few clues on how soon it could push up borrowing costs.
Sterling was an exceptional gainer against both the dollar and euro, with the Bank of England expected to hold the line on its borrowing rates later on Thursday and likely steer as hawkish as the Fed.
Above-forecast wage and inflation data this week cemented the hawkish UK picture even amid signs of an alarming manufacturing slump — with 10-year UK government borrowing premiums over Germany ballooning to its widest since 1990.
Elsewhere, a hawkish Norwegian central bank also held policy rates steady. Sweden's Riksbanks cut as expected, but also guided on a more cautious approach next year.
In Brazil, there was growing concern about the fiscal and monetary mix there as Brazil's real tumbled by the most in over two years to a fresh record low on Wednesday and stocks and bonds were pressured as financial markets put the Brazilian government's spending plans and widening deficit to the test.
The alarming sight of the currency falling after such steep central bank interest rate rises this week and with bond yields climbing is seen by many as a red flag.
Back stateside, post-election winner Bitcoin was knocked back briefly below $100,000 as the dollar revved up post-Fed — but reclaimed the round figure on Thursday.
Key developments that should provide more direction to U.S. markets later on Thursday:
* Bank of England policy decision and statement; Brazil Central Bank releases Inflation Report, Central Bank of Mexico releases inflation report
* US Q3 GDP revision, Q3 corporate profits, weekly jobless claims, Philadelphia Federal Reserve's December business survey, November existing home sales, Kansas City Fed manufacturing survey, October TIC data on overseas Treasury holdings
* US Treasury sells 5-year inflation-protected securities
* U.S. corporate earnings: FedEx, Nike, Conagra Brands, Lamb Weston, Darden Restaurants, Accenture, Carmax, Factset, Paychex, Cintas
* European Union summit in Brussels