Hawkish cut: Fed delivers 25bp but slashes 2025 cuts, S&P drops 3%

The FOMC on December 18 2024 delivered a widely-expected 25 bp cut to 4.25-4.50%, but the updated dot plot and Powell's press conference were decisively hawkish. The median 2025 projection showed only 2 cuts (from 4 in September), with the terminal rate raised to 3.9% from 3.4%. Powell emphasized that further cuts required "further progress" on inflation and acknowledged the committee was "closer to neutral" rates.

Market reaction was violent. The S&P 500 fell 2.95%, its worst session since August 5 2024 (yen carry unwind). The Nasdaq 100 declined 3.56%. The 10Y yield jumped 12 bps to 4.51%. VIX gained 74% in a single session, exploding from 15.87 to 27.62 as hedge demand materialized into a holiday-thin order book. The dollar strengthened 1.25% (DXY).

The session redefined 2025 rate expectations. Fed funds futures repriced from ~4 cuts in 2025 to ~1.5, a 65 bp repricing in a single session. This aligned forward curves with Fed guidance but crushed duration-sensitive trades (long bonds, REITs, utilities, small caps). The December 18 drop marked the start of a consolidation period that lasted into February 2025 before the April Liberation Day shock reset the regime again.