Fed Cuts Rates But Signals A Pause Ahead, Triggering Stock Market Plunge

Federal Reserve officials cut benchmark interest rates by another 25 basis points Wednesday, capping 2024 with a full percentage point of relief over the last four months.

The quarter-point cut was almost universally predicted by investors and leaves the target range for the federal funds rate between 4.25% and 4.5%. But Fed Chair Jerome Powell signaled that the central bank will slow its pace of cuts in 2025.

“Timing just suggests that we're at a place where, assuming the economy develops as expected, we're at or near a level that will make it appropriate to slow the pace of adjustment,” Powell said.

Stocks plummeted following the Fed’s announcement, which included data to suggest there could be as few as two total 25-basis-point rate cuts in 2025. The Dow Jones Industrial Average fell 2.6%, or more than 1,100 points, and the close marked the first 10-day losing streak for the index since 1974.

Commercial real estate stocks were hit particularly hard, with the FTSE Nareit Equity REITs index down 4% on the day. BXP, Prologis, Regency Centers, AvalonBay Communities and others fell by more than 3%.

Yields on the 10-year Treasury hit 4.5% after the announcement, their highest level since May.

The Fed’s three rate cuts since September are likely to boost the commercial real estate sector, particularly helping to mitigate refinancing risk along the margins, Moody’s Director of Economic Research Ermengarde Jabir said in a statement before the announcement. 

Multifamily landlords, who have been squeezed by rising operating expenses and weakened rent growth, could also see a boost to values as capitalization rates compress in response to lower debt costs, she said. 

“However, for a sector experiencing structural shifts, like office, a 100 bps is still not enough to drive an absolute turnaround in fortunes,” she said. 

Powell told reporters that uncertainty around inflation had increased. Federal Open Market Committee members were also mixed over whether they considered potential impacts from the incoming Trump administration in the policy decision. 

“Today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals: maximum employment and price stability,” he said.

Beth Hammack at the Federal Reserve Bank of Cleveland was the only member of the FOMC to vote against Wednesday’s cut, preferring instead to keep rates the same.

The Fed also added a phrase to its guidance that softens its language around future cuts, saying it would consider the “extent and timing” of additional rate cuts based on the evolving economic outlook.

“We coupled this decision today with the extent and timing language in the postmeeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments,” Powell said.

The Fed first cut rates in September, when the economy showed signs of a slowdown. Even then, some economists questioned whether the Fed should begin easing borrowing costs when inflation remained above the bank’s 2% target. 

Inflation remains elevated today, with the personal consumption expenditures index at 2.3% year-over-year in November, a faster pace than the 2.1% uptick recorded in the prior month. 

Strong economic fundamentals and questions about inflationary pressures from the potential policies of Donald Trump’s incoming presidential administration led Jabir and other economists to warn ahead of Wednesday’s meeting that more cuts could be premature. 

The Fed updated its projections for PCE inflation Wednesday to show it rising to 2.5% in 2025 before beginning to come down. The Fed has long said its target for inflation was 2%, and reporters grilled Powell on the choice to make Wednesday’s cut given market conditions.

Powell said the Fed was seeing meaningful progress toward its inflation target but that the labor market was gradually cooling and needed to be monitored as part of the central bank’s dual mandate. 

“We've had a year-end projection for inflation, and it's kind of falling apart as we approach the end of the year,” Powell said. “So that is certainly a large factor in people's thinking.” 

Developers with projects in the early stages of construction stand to benefit the most from the cuts, as the Fed’s moves have been reflected in shorter-term construction financing, said J.C. de Ona, Southeast Florida division president at Centennial Bank. Assets with longer-term debt stand to benefit less, since their debt costs are typically tied to the yield on the 10-year Treasury bond, which has continued an upward trend despite rate relief.

Investors are preparing for the Fed to shift from its aggressive rate-cutting posture toward a more cautious approach in 2025, largely because the broader economy continues to see steady growth. 

The FOMC will meet again on Jan. 27 and 28 to vote on any rate adjustment, but roughly 80% of investors expect the Fed to hold rates steady in January, according to CME Group.  

UPDATE, DEC. 18, 2:50 P.M. ET: This story has been updated with comments from Federal Reserve Chair Jerome Powell.

UPDATE, DEC. 18, 4:38 P.M. ET: This story has been updated to reflect changes in the stock market since the Fed's press conference.