US stocks experienced their steepest decline in months on Wednesday after the Federal Reserve implemented a 25-basis-point rate cut but hinted at a cautious approach to easing next year.

The Dow Jones Industrial Average dropped 1,123.03 points, or 2.58%, to 42,326.87, marking its 10th consecutive loss—the longest losing streak since 1974. The S&P 500 fell 178.45 points, or 2.95%, to 5,872.16, while the Nasdaq Composite slumped 716.37 points, or 3.56%, to 19,392.69.

Despite the sharp losses, all three indexes remain significantly up year-to-date, driven by optimism around artificial intelligence and deregulation policies under President-elect Donald Trump. However, concerns over potential inflationary impacts from tariffs continue to weigh on investors.

The Federal Reserve reduced rates to a 4.25%-4.50% range but projected only two additional cuts by the end of 2025. The cautious outlook and strong labour market led the Fed to maintain a measured stance on further monetary easing.

"The economy is running hotter than anticipated, and the Fed had little choice but to adjust its projections accordingly," said Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management.

All 11 major S&P 500 sectors closed lower, with real estate falling 4% and consumer discretionary stocks leading the declines at 4.7%. Cryptocurrency-related stocks were hit particularly hard following Fed Chair Jerome Powell's comments dismissing any interest in government ownership of bitcoin. MicroStrategy dropped 9.5%, MARA Holdings plunged 12.2%, and Riot Platforms fell 14.5%.

Small-cap stocks also tumbled, with the Russell 2000 declining 4.4%, its worst single-day drop since June 2022.

The CBOE Volatility Index surged to a four-month high of 27.62, reflecting heightened investor anxiety. Meanwhile, US Treasury yields rose, with the 10-year note reaching 4.518%, adding further pressure on equity markets.

Market participants are pricing in expectations for steady Fed rates at its January meeting, with reduced rate cuts of 33 basis points projected for 2025, down from 49 basis points prior to the announcement.

"Higher rates remain a significant challenge for equities, as they crimp growth prospects and increase the appeal of safer investments," said Ross Mayfield, Investment Strategist at Baird.

Trading volumes on US exchanges reached 18.59 billion shares, far above the 20-day average of 14.36 billion, underscoring heightened activity amid market uncertainty.

Reuters