Is the Fed's rate cut plan in jeopardy?
US stocks tumbled Friday as renewed concerns about inflation and potential tariffs weighed on investor sentiment, erasing earlier gains for the week.
According to the Associated Press, the S&P 500 dropped 0.9%, marking one of its worst declines in the early part of 2025, while the Dow Jones Industrial Average fell 444 points, or 1%. The Nasdaq composite suffered the biggest decline, dropping 1.4%, driven largely by Amazon’s disappointing revenue forecast.
Investor anxiety was fueled by a preliminary report from the University of Michigan, which indicated that US consumers now expect inflation to reach 4.3% over the next year—the highest forecast since 2023. This represents a full percentage point above expectation reported just a month earlier. Economists suggested that concerns over potential US tariffs, which president Donald Trump has proposed, may be contributing to these rising inflation expectations.
Speaking at a White House press conference Friday, Trump signaled that an announcement on tariffs could come as early as Monday or Tuesday. “Reciprocal tariffs, where a country pays so much or charges us so much, and we do the same,” Trump said.
Interest rates
Friday’s trading session followed a mixed report on the US labor market, which showed job growth slowing in January. While hiring was significantly weaker than December’s pace, the report contained some positive signs, including a lower unemployment rate and stronger-than-expected wage growth.
The Federal Reserve’s interest rate policy remains a key focus for Wall Street. The central bank began lowering its benchmark interest rate in September 2024 but has warned that fewer cuts may come in 2025 than initially anticipated. Lower interest rates tend to boost stock prices but can also exacerbate inflation.
Scott Wren, senior global market strategist at Wells Fargo Investment Institute, stated that the jobs report did not alter his expectation that the Fed will cut rates just once in 2025. While some investors are anticipating at least two cuts, CME Group data indicates that a portion of traders are also bracing for the possibility of no rate reductions.
Market volatility and corporate earnings
Uncertainty over potential tariffs and interest rates contributed to stock market volatility, particularly for large corporations. Despite reporting strong earnings for the final quarter of 2024, Amazon’s stock slid 4.1% as its revenue outlook fell short of analysts’ expectations. Homebuilders also saw sharp losses, with D.R. Horton and Lennar dropping 5% and 4.2%, respectively, amid concerns that sustained high interest rates could keep mortgage rates elevated.
On the other hand, Expedia Group surged 17.3% after delivering stronger-than-expected earnings and announcing the reinstatement of its dividend, which had been suspended in 2020 due to the COVID-19 pandemic.
Market and bond performance
The S&P 500 closed at 6,025.99, shedding 57.58 points. The Dow Jones Industrial Average ended at 44,303.40, down 444.23 points, while the Nasdaq composite dropped 268.59 points to 19,523.40.
In the bond market, the 10-year Treasury yield rose to 4.48% from 4.44% the previous day, while the two-year Treasury yield increased to 4.28% from 4.22%.
Looking ahead, analysts warn that economic uncertainty, particularly surrounding tariffs and inflation, may continue to drive market fluctuations. Global markets reflected similar concerns, with European indexes falling moderately after a mixed session in Asia.
