Global markets are poised to end the week on a downward trend after the U.S. Federal Reserve’s hawkish rate cut on Wednesday led to a surge in government bond yields and drained liquidity.

Stock Markets Decline

Major equity markets across the globe experienced significant losses, with Thursday marking one of the broadest selloffs since August. The Fed’s decision, which projected fewer rate cuts in 2025, dashed hopes for a year-end “Santa Rally” and spurred negative sentiment among investors.

In the U.S., the Dow Jones Industrial Average fell 3.39% over the past five trading days, while the S&P 500 dropped 3.04% and the tech-heavy Nasdaq Composite slid 2.8%. The small-cap Russell 2000 was hit hardest, tumbling 5.5%. All 11 sectors of the S&P 500 ended the week in negative territory, with real estate and energy leading losses at 6.84% and 6.76%, respectively.

In Europe, major indices also posted significant declines. The pan-European Stoxx 600 fell 2.32%, Germany’s DAX dropped 2.14%, France’s CAC 40 slipped 1.55%, and the UK’s FTSE 100 shed 2.35%. Declines in energy and industrial stocks weighed heavily on these markets, with oil and metal prices under pressure.

Bond Yields Soar

The Fed’s stance sent yields on benchmark government bonds soaring. The U.S. 10-year Treasury yield rose to 4.56%, its highest level since May, while Germany’s 10-year bond yield climbed to 2.3%, a one-month high.

Divergent Central Bank Policies

Central banks around the world responded differently to economic conditions.

In the UK, the Bank of England held interest rates steady at 4.75% but signaled caution about future rate cuts. Governor Andrew Bailey emphasized a gradual approach, contrasting sharply with the Fed’s hawkish outlook. This divergence weakened the British pound to its lowest level since May.

Meanwhile, the Bank of Japan maintained its policy rate and gave no clear guidance on future hikes, causing the yen to weaken against the dollar. In China, the People’s Bank of China left its loan prime rates unchanged, likely influenced by the Fed’s position.

Economic Data and Outlook

In the U.S., third-quarter GDP growth was revised upward to an annualized rate of 3.1%, reinforcing the Fed’s cautious approach to easing. However, New Zealand slipped into a technical recession after consecutive quarters of contraction.

The week’s developments underscore challenges for global markets as they navigate mixed economic signals, tightening monetary policies, and geopolitical uncertainties.

Wall Street experienced a sharp decline as Federal Reserve Chair Jerome Powell adopted a hawkish tone during the December Federal Open Market Committee (FOMC) meeting. The dollar surged to a two-year high, Treasury yields spiked, and Bitcoin tumbled following Powell’s warning of inflation risks and cautious approach to future rate cuts.

The FOMC, as expected, announced a 25-basis-point rate cut, bringing the target range to 4.25%-4.50%. However, the updated economic projections dampened investor sentiment, indicating only two rate cuts in 2025, a significant shift from the four cuts projected in September.

Powell Signals “New Phase” for Monetary Policy

In a press conference, Powell highlighted the Fed’s cautious stance moving forward. “From here, it’s a new phase, and we’re going to be cautious about further cuts,” he said, adding that interest rates are nearing neutral levels—neither stimulating nor restricting economic growth.

While emphasizing the resilience of the U.S. economy, Powell downplayed recession risks. “Most forecasters have been predicting a slowdown in growth for a very long time, and it keeps not happening,” he stated.

Fresh inflation projections fueled the Fed’s recalibrated stance. Headline inflation for 2025 is now expected to hit 2.5%, up from 2.1%, while core inflation is also forecasted at 2.5%, up from 2.2%. Powell reiterated the Fed’s commitment to achieving its 2% inflation target, though he acknowledged it could take “another year or two.”

Market Reaction: Stocks Plunge, Dollar and Yields Surge

The Fed’s stance triggered a broad market sell-off. The S&P 500 fell 3.03% to 5,866.80, the Nasdaq 100 sank 3.74%, and the Dow Jones dropped 1,103 points (-2.54%). Tesla Inc. led the tech sector’s decline, plummeting 8.1%. The CBOE Volatility Index, a measure of market fear, spiked nearly 60%, reflecting heightened investor anxiety.

The dollar index (DXY) climbed 1.22% to 108.265, its highest level in two years, while the euro slid 1.33% to $1.03518, its weakest point since November 2022. Commodities were not spared, with gold dropping 2.3% to $2,584 and silver tumbling 3.9% to a five-week low. Treasury yields surged as investors reassessed rate-cut expectations, with the 10-year yield rising 12 basis points to 4.52%, the highest since late May.

Bitcoin Falls as Powell Rejects Crypto Reserve Tool

Cryptocurrency markets faced additional pressure as Powell dismissed the idea of a U.S. government-backed Bitcoin reserve. “We’re not allowed to own Bitcoin,” Powell clarified, citing legal constraints. Bitcoin fell over 5%, dropping to approximately $100,000, further straining the market.

As the Fed signaled a cautious path forward, concerns over restrictive monetary policy, inflation, and broader economic challenges have fueled investor unease, setting the stage for continued market volatility.