In a move that sent shockwaves through the financial markets, the Federal Reserve recently implemented its third consecutive interest rate cut, a decision that, contrary to expectations, did not quell investor fearsInstead, it led to an intense wave of selling across risk assets as market participants reacted to hints of a more cautious monetary policyFederal Reserve Chair Jerome Powell's remarks regarding persistent inflation and a possible pause in further cuts sent the stock market into a tailspin, culminating in one of the worst performances since the onset of the COVID-19 pandemic.

Prior to the announcement of the rate cut, the S&P 500 had exhibited a momentary uptrend; however, the situation took a sharp turn, resulting in a 3% decline, which marked a significant fallout in what many are now dubbing "Fed Day". By the day's end, fewer than 20 benchmark stocks registered gains, while small-cap stocks found themselves at the epicenter of the destruction

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The Russell 2000 index plummeted by an astounding 4.4%, reflecting the steepest single-day drop since June 2022.

Compounding the concern, U.STreasury yields soared in the wake of the rate cut, showcasing the most hawkish response from the Federal Reserve since the tapering panic of 2013. Market instability spread like wildfire, resulting in the Chicago Board Options Exchange Volatility Index (VIX) surging to 28—the highest levels observed since August's volatility shockThis spike in the VIX indicated that investors were rushing to hedge their positions, highlighting an overwhelming fear of increased market volatility.

In the midst of this turmoil, Max Gokhman, Senior Vice President at Franklin Templeton Investment Solutions, described Jerome Powell as a “hawk in dove’s clothing.” Gokhman emphasized that while Powell attempted to downplay the recent signs of moderating inflation and touted the robustness of the economic recovery, he also hinted that tariffs would not be perceived as a temporary issue

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He stressed the necessity for two rate cuts in 2025 to maintain a restrictive policy stance.

Watson, the co-head of fixed income and liquidity as well as co-CIO, shared insights indicating that while the Federal Reserve chose to conclude the year with a third consecutive rate cut, hints of a more gradual pace of easing seemed to dominate the conversation regarding future policies.

Analysts like Tony Sicamore from IG in Sydney projected that the combination of rising yields and a stronger U.Sdollar could lead to a 1.5% to 2% decline when Asian markets openedA weaker yen, however, was suggested to provide some support against broader sell-offs in Japan’s Nikkei index.

Whitney Watson from Goldman Sachs Asset Management countered, predicting a skip on potential rate cuts in January next year, only to resume easing in March, perhaps indicating a divergence in views on the viability of sustained monetary support in the short term.

Other chief investment strategists, including Mark Lucchini and Gianni Montgomery Scott, voiced that the Fed's decision to cut rates came as no surprise, largely because market pricing had already factored in a near 100% probability of such action

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Nonetheless, they highlighted concerns among investors about the language used in the Fed’s announcement; it included references not only to economic data but also to the impending government policies that could usher in additional uncertainties.

Jamie Cox, managing partner at Harris Financial Group, remarked that the stock market had already seen substantial gains prior to this meetingTherefore, the decision to cut rates acted merely as a catalyst for investors aiming to capitalize on profits before the holiday season descended, especially within overvalued sectors such as technology.

Michael O'Rourke, chief market strategist at JonesTrading, indicated an upward shift in the entire Federal Funds curve, visible through the yields on both two-year and ten-year notesHe pointed out that these yield surges would exert greater pressure on risk assets, suggesting that market participants had failed to adequately adjust their expectations in light of more hawkish rate outlooks, thus justifying a rational basis for year-end profit-taking.

Jim Awad, the senior managing director at Clearstead Advisors, observed a rapid waning of expectations surrounding further rate cuts next year

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It appeared the market was leaning towards the likelihood of just one cut, a scenario that would imply prolonged inflation and elevated rates—conditions detrimental to equity valuationsMoreover, he noted the escalating financing costs could exacerbate deficit challenges.

Chris Zaccarelli, chief investment officer at Northlight Capital Management, noted that while the Fed attempted to provide market participants with what they desired, the reception to this 'gift' was lukewarm at bestHe explained that the market was forward-looking, focusing less on the 25 basis point cut executed today and more on the likely future cuts that appeared to under-deliver from expectationsConsidering the diminished expectations for only two rate cuts, market reactions turned sour.

Steve Sosnick, chief strategist at Interactive Brokers, articulated a sense of confusion regarding the bond market's response to the rates announcement

He opined that fixed income traders should not have expressed surprise at the 9-12 basis point adjustments unless there existed significant dissatisfaction with potential further cutsFollowing the rate heightening, a stronger dollar emerged, imposing challenges on multinational companies and indicating a shift in focus towards protective strategies, reflected in the climbing VIX.

Finally, according to a survey conducted by Markets Live Pulse, respondents anticipated the benchmark 10-year Treasury yield to fall from roughly 4.51% to 4.4% by March's Federal Reserve meeting next yearHowever, in the aftermath of the Fed’s decisions, a drastic downturn was witnessed in the bond market, resulting in a 12 basis point climb for the 10-year yield—the largest single-day rise since June 2013. Notably, 36% of those surveyed believed that the Fed underestimated its long-term neutral rate, despite officials raising growth forecasts from around 2.9% in September to 3%.