Financial markets experienced a major shock following an unexpected statement by Federal Reserve Chairman Jerome Powell regarding the outlook for monetary policy in 2025. Despite the recent third consecutive cut to the key interest rate, his cautious forecast about further easing of monetary policy triggered a massive sell-off in the markets.
Investor reaction was immediate: the S&P 500 index dropped by 3%, while the yield on 10-year Treasury bonds reached its highest level in the past seven months. Such a sharp drop in the stock market on the day of a Fed meeting had not been seen since September 2001, when the index fell by nearly 5%.
The situation is further complicated by the anticipated return of Donald Trump to the White House. His promises to raise tariffs on U.S. trading partners and lower taxes could exacerbate inflationary pressures, significantly increasing uncertainty for market participants.
High-risk assets were the most sensitive to the change in sentiment. Goldman Sachs’ index of the most heavily shorted stocks fell by 4.9%, while the measure of loss-making tech companies declined by 6.4%—the largest drop in two years. Tesla shares lost 8.3% of their value, and Bitcoin, which had recently approached the $108,000 mark, dropped by 5%.
Experts note that the market was unprepared for this turn of events. According to Tom di Galoma of Curvature Securities, the Fed is shifting to a more neutral stance as it awaits further actions from the new administration. Current forecasts suggest fewer than two rate cuts of a quarter percentage point each throughout 2025, a scenario even more conservative than what the Fed’s official projections indicate.
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