Fed’s higher inflation forecast and rate projections rattle the stock market

• The stock market took an unexpectedly nasty tumble following a routine rate cut amid—critically—broader signals that the Federal Reserve might only cut rates twice in 2025 instead of four more times.

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Markets nosedived in response to indications of a more conservative stance than previously expected. The Dow Jones Industrial Average dropped 2.6%, while the Nasdaq composite fell more than 3.5%. The S&P 500 sunk 2.9%. Among the key signals from the Fed include a higher terminal interest rate projection of 3% rather than 2.875%, and an increased inflation forecast of 2.5% next year. Both points suggest the Fed will slow its roll on rate cuts until inflation shows a steady decline.

Brian Albrecht, chief economist at the International Center for Law and Economics, noted that, as always, reading any stock movement is “a fickle thing,” he told Fortune.

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“Here the timing strongly suggests it’s because of the worry of inflation returning (or the Fed thinking it will),” said Albrecht.

In a statement, BlackRock chief investment office of global fixed income Rick Rieder said the Fed’s moves essentially signal the end of one story and the beginning of another. “To us, this suggests that we’ve entered a new phase of the rate cutting cycle,” wrote Rieder, who is the head of BlackRock’s global allocation investment team. “In fact, we now enter a period that may be quite different than the prior couple of quarters.” BlackRock manages $3 trillion in fixed income assets for its clients.

Fed officials use what’s called a dot plot to show where interest rates might be in the future, with each dot representing an individual’s viewpoint. The dot plot is published every quarter. The plot on Wednesday showed a reduction in expected rate cuts from four to two, and an increase in the terminal interest rate projection. According to Rieder, who played on the Warner Brothers cartoon ending, “That’s all folks!” it might be the end of the intense focus on the dot plot. “‘Dots’ All Folks,” Rieder wrote.

The dot plot is less critical now because the transition from President Biden to President-elect Donald Trump “will introduce new, and arguably unpredictable influences on the economy, and specifically on the Fed’s employment and inflation objectives,” said Rieder.

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One of Trump’s clear priorities is a focus on illegal immigration. “That said, legal immigration has been a major influence on hiring in the United States over the prior few years, to the tune of an estimated several million people hired, and it’s very much been at the heart of solving some major U.S. employment deficiencies in areas such as restaurants, hotels, airlines, education, healthcare, etc.”

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