Stock Markets Sink as Traders Sour on the Federal Reserve
Stock Markets Sink as Traders Sour on the Federal Reserve
By:Ilya Spivak
Stock markets have decided that they are unhappy with the Federal Reserve
- Markets struggled at first with what to make of the Fed monetary policy update
- Traders weighed underwhelming 2026 rate cut bets against new asset purchases
- Stocks seesawed amid uncertainty, then finally plunged to end the trading week
The markets seemed wholly focused on the outcome of the year’s last monetary policy update from the Federal Reserve at the start of the trading week. As the dust began to settle after Wednesday’s announcement, traders appeared to be struggling with what to make of the outcome.
The bellwether S&P 500 stock index finished the day cautiously higher after Fed Chair Jerome Powell walked off the podium at the obligatory press conference following the conclave of the Federal Open Market Committee (FOMC). However, prices pointedly fell short of a move beyond the bounds of their narrow weekly range.
Officials voted for a 25-basis-point (bps) rate cut, as widely expected. The perennially dovish Stephen Miran dissented in favor of a 50bps reduction. Chicago and Kansas City Fed presidents Austan Goolsbee and Jeffrey Schmid also broke ranks with the majority, voting against cutting rates altogether.
Markets to Fed officials: make this make sense
That much seemed easy enough to digest. Conflicting cues coming alongside the rate cut were harder to reconcile. On one hand, a new Summary of Economic Projections (SEP) continued to show just one 25bps rate cut in 2026, clashing with the markets’ call for at least 50bps. This disparity has long bothered traders, and it was left glaringly unresolved.
On the other hand, the Federal Open Market Committee (FOMC) resolved to “initiate purchases of short-term Treasury securities” in a bid to bring money market lending rates back in line with the Fed’s target. Powell explained that this would entail buying $40 billion of Treasury bills per month, starting this week.
The gap between the Secured Overnight Financing Rate (SOFR), the broadest measure of the cost of overnight funding secured by Treasuries, and that of the effective Fed Funds rate, the Fed’s policy goal, has been widening since mid-year. It spiked to a worrying six-year high of 36bps in October.
Traders decide the FOMC missed the mark after all
Powell went to great lengths to explain that these purchases were not intended as stimulus and aimed only to ensure smooth market function from the year-end liquidity drain to the busy refinancing period heading into April’s tax reporting season. Nevertheless, traders picked up a whiff of quantitative easing (QE). The US dollar conspicuously fell.
Traders spent the better part of 48 hours swinging prices back and forth in head-spinning ranges as they tried to decide what all of this will mean for the market mood. The results were finally in by Friday as the S&P 500 and the tech-tilted Nasdaq 100 suffered their biggest one-day losses in three weeks, dropping 1.11% and 1.94% respectively.
Sellers were supposedly set off by earnings reports from Oracle Corp (ORCL) and Broadcom Inc (AVGO), which seemed to hint at cooling momentum in the buildout of artificial intelligence (AI). Such nuance might have been painlessly ignored amid feverish AI optimism mere months ago. Not so, it seems, if Fed easing feels inadequate.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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