Expectations of Fed cuts were the death blow for markets

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A cut now, but less ahead
The US Federal Reserve interest rate cuts by 25 basis points on Wednesday, taking its overnight rate to a target range of 4.25%-4.5%. In the Fed’s dot chart indicating rate expectations over the next few years, the central bank mainly indicated only two rate cuts by 2025fewer than the four previously planned cuts in September.

Strong selling in the markets
US markets sold strongly on Wednesday. The Dow Jones Industrial Average lost more than 1,000 points, shedding 2.58% for its 10th consecutive day of losses. The S&P 500 retreated by 2.95% and the Nasdaq Composite it sank 3.56%. The pan-European Stoxx 600 — that ended the negotiation before the Fed’s decision, it added 0.15%.

Tesla stock reverses
Tesla shares fell 8.3% on Wednesday, its steeper drop since Donald Trump won the US presidential election in November amid heavy losses in the broader market. While shares are still up 75% since the Nov. 5 election, the company’s shares appear “widely disconnected … from fundamentals,” Barclay analysts wrote in a report Wednesday.

Disappointing guidance from Micron
Shares of Micro fell more than 15% in extended trading after the company gave up guidance substantially weaker than expectedthough it beat expectations on earnings in its latest quarter. For the current quarter, Micron expects revenue to be around $7.9 billion. That’s well short of the $8.98 billion expected by analysts, according to LSEG.

(PRO) Why the markets were so disappointed
The stock market took a beating after digesting the Fed’s forecast that monetary policy in 2025 will remain tighter than expected. CNBC’s Sarah Min looks at why investors were very disappointedand what market watchers think about the Fed’s decision.

But investors were already confident of a Fed cut on Wednesday. Before the Fed’s December meeting concluded, the futures market indicated a 98% chance of a 25 basis point cut, according to the CME FedWatch tool. This means that investors had already priced in the benefits of the rate cut in equities. In other words, yesterday’s cut would have little impact on share prices. Perhaps investors were valuing even more optimism than that single rate cut. Just a day ago, investors were betting on an 81.6% chance the Fed would cut rates by another 25 basis points in January.

Fed Chairman Jerome Powell crushed that hope.

“With today’s action, we have reduced our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Powell said in his post-meeting press conference. “Therefore, we can be more cautious as we consider further adjustments to our policy rate.”

The chance of a 25-point cut next month evaporated to just 6.4%, according to the futures market, after the Fed released its updated dot chart that indicated just two cuts by 2025.

It’s this massive paradigm shift — from the expectation that the Fed will go full throttle with cuts to the reality that it might even lift its foot off the accelerator — that is sending tremors through the markets.

To put it another way: It’s like waking up expecting a present on Christmas Day, only to find no presents. This disappointment would not occur at any other time of the year.

As David Russell, global head of market strategy at TradeStation, said, “Goodbye punch. No Christmas cheer from the Fed.”

– CNBC’s Daria Mercado, Jeff Cox, Yun Li, Brian Evans and Lisa Kailai Han contributed to this report.