US stocks are facing a fresh challenge as Treasury yields rise after the Federal Reserve signaled fewer interest rate cuts for 2025. The central bank’s decision caught investors off guard, leading to a sharp decline in stock prices and an increase in yields.
The Fed lifted its forecast for expected inflation next year, paving the way for higher interest rates than previously anticipated. Concerns about incoming President Donald Trump’s policies further exacerbated market uncertainty.
Benchmark Treasury yields rose sharply after the meeting, hitting a 6-1/2 month high at 4.54%. Investors are worried that rising yields will undermine the momentum for stocks, which are trading at elevated valuations.
The S&P 500 ended down nearly 3% on Wednesday, its biggest one-day drop since August. The Nasdaq also slumped 3.6%, while European stocks fell around 1.5%.
Despite some investors remaining bullish on the outlook for stocks, the Fed’s more hawkish outlook has rippled through asset prices. The dollar index soared to its highest level in two years following the meeting, while gold dropped about 2%.
Investors are closely monitoring the trajectory of monetary policy, as it influences bond yields and dictates borrowing costs. Treasury yields breaching a key 4.5% level could cause turbulence for stocks and benefit lower-risk alternatives.
Analysts predict that benchmark yields will rise to 5% next year. With stocks trading at high valuations, even small changes in Treasury yields pose a significant risk.
Source: https://www.reuters.com/markets/us/us-stocks-face-headwind-rising-yields-after-fed-signals-fewer-rate-cuts-2024-12-19