â—‰ Abstract
On December 18, 2024, the Federal Reserve lowered interest rates by 0.25%, marking its third cut in a row. However, the Fed also said it might not cut rates much more in the future because it expects the economy to grow stronger and inflation to continue. This cautious message worried investors, causing a sharp drop in the stock market.
The S&P 500 fell about 2.96%, its biggest one-day loss since August. Gold prices also dropped by around 1.6%. The declines in both stocks and gold show that investors are feeling uncertain about the economy and are rethinking their investments based on the Fed’s outlook.
â—‰ Introduction
On December 18, 2024, both the S&P 500 and gold experienced significant declines, driven primarily by the Federal Reserve’s monetary policy decisions and market reactions to economic forecasts.
â—‰ Federal Reserve's Decision
- The Federal Reserve cut interest rates by 0.25%. This is typically a positive move for equities and commodities like gold.
- However, the Fed signalled a more cautious approach to future rate cuts, expecting stronger economic growth and persistent inflation.
- This cautious outlook raised concerns about the possibility of limited future rate cuts, which spooked investors.
â—‰ Market Reactions
Stock Market Decline:
- The S&P 500 fell by approximately 2.96%, marking its largest single-day percentage drop since August 5th.
- The market’s reaction reflected a realization that previous optimistic expectations about aggressive rate cuts were misplaced.
Gold’s Decline:
- Gold prices dropped sharply, with an intraday decline of about 1.6%.
- Gold, while a safe-haven asset, is less desirable in a rising rate environment due to increased opportunity costs.
- With the Fed’s indication of fewer future rate cuts, investors shifted away from gold.
â—‰ Overall Market Sentiment
The simultaneous decline in both equities and gold can be attributed to a broader market sentiment that reacted negatively to the Fed’s cautious outlook on inflation and growth prospects. This created a risk-off environment where investors were uncertain about both stock valuations and commodity holdings.
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