The recent decision by the Federal Reserve to lower interest rates for the third consecutive time, a move anticipated by many market participants, not only failed to calm investors but instead triggered a significant sell-off of risk assetsDuring a pivotal speech, Fed Chair Jerome Powell indicated that in light of ongoing inflationary pressures exceeding expectations, the central bank may pause any additional rate cutsThis announcement led to a tumultuous end to the trading day, characterized by a sharp decline in stock markets.

In fact, prior to the announcement of the rate cut, the S&P 500 had briefly rallied, only to plummet by 3% afterwardsThis marked the worst performance of a 'Fed Day' since the emergency rate cuts initiated during the COVID-19 pandemic in March 2020. By the day's close, only a handful of benchmark stocks managed to finish in the green, while small-cap stocks bore the brunt of the market's sell-off, as evidenced by the Russell 2000 index, which experienced a staggering 4.4% drop---the largest single-day loss since June of 2022.

Concurrently, U.S

Treasury yields surged following the rate cut news, marking one of the most hawkish stances displayed by the Fed on a decision day since the taper tantrum of 2013. A wave of investor panic spread rapidly, with the Cboe Volatility Index (VIX) skyrocketing to 28, the highest level recorded since the volatility spike seen in AugustAnalysts described the mood as one of unease, with many scrambling to reassess their risk exposure.

Max Gokhman, a senior vice president at Franklin Templeton Investment Solutions, characterized Powell as a “hawk in dove’s clothing.” He noted that while Powell downplayed the recent easing of deflationary pressures and boasted about the strong economic momentum, there were implications that the tariff situation would not be treated as merely transitoryMoreover, Gokhman suggested that the two predicted rate cuts in 2025 may be essential to maintain a restrictive policy environment.

On the global liquidity side, Watson, co-head of fixed income and liquidity, asserted that while the Fed concluded the year with its third rate cut, indications suggest that a more gradual approach to easing monetary policy may be on the horizon in the New Year.

Market analysts, including Tony Sicammore located in Sydney, forecast that the combination of rising yields and a strengthening dollar could lead to a decline of about 1.5% to 2% when the Asian markets open

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Although the weakened yen might provide some buffer against a declining Nikkei index, the general outlook remained grim.

Whitney Watson from Goldman Sachs Asset Management predicted that the Fed would forgo a rate cut in January of next year, only to resume easing in MarchThe landscape of expectations has shifted, leading investors to recalibrate their strategies accordingly.

Yet, some chief investment strategists like Mark Lukeski and Jenny Montgomery Scott suggested that the Fed's decision to cut rates came as little surprise given that market analysts had nearly priced in a 100% probability of the cutsDespite this consensus, concerns lingered regarding the language used in the announcement, which extended beyond economic data to include considerations of policy initiatives from a newly incoming governmentOriginally, the market had anticipated two to three rate cuts in 2024, but many now lean toward a realistic view of only two cuts, reflecting a retreat from overly optimistic forecasts.

Jamie Cox, managing partner at Harris Financial Group, noted that leading up to this meeting, the stock market had already surged significantly, thus the decision to cut rates acted merely as a catalyst for investors seeking to lock in profits before the holiday season

He expressed skepticism about the high price of stocks, especially technology shares, predicting that investors would rush to exit their positions ahead of the holidays.

Michael O'Rourke, the chief market strategist at Jones Trading, remarked that there has been a notable upward shift in the entire federal funds curve, illustrated by the movements in two-year and ten-year yieldsThe surging yields would only add further pressure on risk assets, as the market had grown accustomed to rising prices without adequately factoring in worries about a more hawkish interest rate outlook, prompting a timely rationale for investors to offload some positions before year-end.

Jim Awad, senior managing director at Clearstead Advisors, emphasized that current expectations surrounding future rate cuts were rapidly diminishing, with the market seemingly predicting only one cut for the following year

This perspective implies a prolonged period of sustained inflation and elevated interest rates, which would adversely affect stock valuationsAwad pointed out that the rising cost of financing would exacerbate the issue of burgeoning deficits.

Chris Zaccarelli, chief investment officer at Northlight Capital Management, elaborated on the frustration within the markets, noting that although the Fed was attempting to provide what traders wanted, the gesture was not welcomedThe market, foreseeing the potential impact of reduced rates, remained focused on whether further cuts would occur in the upcoming yearHowever, the anticipated two cuts, significantly fewer than market expectations, left investors dissatisfied regarding the prospective trajectory of interest rates.

Steve Sosnick, chief strategist at Interactive Brokers, expressed confusion over the bond market's response, suggesting that fixed-income traders should not have been shocked by a fluctuation of 9 to 12 basis points unless they were exceptionally disheartened by the prospects of further rate reductions