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US long-term bond yields climbed higher again on Thursday, a day after Federal Reserve officials said they expected to cut interest rates much more slowly next year than previously anticipated.

The yield on the benchmark 10-year Treasury, which moves inversely to its price, rose as much as 0.09 percentage points to 4.59 per cent, its highest level in more than six months, after jumping on Wednesday.

The dollar gained a further 0.3 per cent against a basket of peers on Thursday, after soaring to the highest level since November 2022 in the previous session.

The Fed on Wednesday reduced interest rates by a quarter-point but unsettled investors after officials raised their 2025 inflation forecasts and cut back their projections for further rate cuts. It was the central bank’s final meeting before Donald Trump takes office next month.

Concerns about inflation stalling above 2 per cent contributed to Fed officials forecasting just half a percentage point worth of cuts in 2025, down from a full percentage point in their previous projections in September.

“I think the market had anticipated that the Fed would cut rates, but would also continue to give itself optionality for additional cuts for next year,” said Akshay Singal, global head of short-term interest rate trading at Citigroup.

Instead the US central bank had significantly shifted and had given itself more of an option “to keep rates on hold for a period of time” to absorb any impact from looser fiscal policy, he added, predicting the hawkish rhetoric would continue to boost the dollar.

Investors now see a roughly 85 per cent chance that the Fed either refrains from a rate reduction, or cuts rates once or twice next year, according to CME Group data based on federal funds futures.

The S&P 500 was 0.4 per cent higher in afternoon trading on Wall Street, well below earlier levels that had pushed it up more than 1 per cent. The US’s main equities barometer slid nearly 3 per cent on Wednesday, in its biggest fall since August.

The tech-heavy Nasdaq Composite gained 0.3 per cent after dropping 3.6 per cent on Wednesday. Six of the Magnificent Seven tech behemoths — Apple, Microsoft, Alphabet, Amazon, Meta and Nvidia — advanced. However, Tesla, which has been boosted in part by co-founder Elon Musk’s warm relations with president-elect Trump, slipped 2 per cent after sinking 8 per cent in the previous session.

“We’ve been so focused on Trump [in recent weeks] but right now it seems to almost be back to a Jay Powell type stock market,” said Jeff Weniger, head of equity strategy at WisdomTree, referring to the chair of the Fed.

The Fed’s hawkish outlook ricocheted into markets in Europe and Asia on Thursday. Europe’s benchmark Stoxx 600 dropped 1.5 per cent and the UK’s FTSE 100 fell 1.1 per cent. Earlier, markets in India, Japan, South Korea and Hong Kong also closed in the red.

Emerging market stocks were also hit, with MSCI’s broad EM index sliding 1.2 per cent.

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

For markets, US Federal Reserve chief Jay Powell is the Grinch who stole Christmas. But the festive shakeout in bonds, currencies and stocks now under way in the wake of the US central bank’s latest pronouncements is a mini-crisis of investors’ own making.

Fed meetings, and the minutiae of its public statements, are always marquee events for investors, setting the tone across all major asset classes. Wednesday’s meeting, the last of 2024, always came with the potential for greater punch, given the timing — right on the cusp of Donald Trump’s second stint in the White House. 

The decision on rates itself — a quarter-point chop off the benchmark — was in line with expectations. But it went downhill from there, as the central bank’s apparent cooling on further cuts next year — an allusion to the potentially inflationary impact of Trump’s economic policies — has gone down like a mouldy mince pie.

US stocks nosedived, wiping out almost all of the gains in the S&P 500 benchmark index since Trump’s re-election day. The following morning brought a similar sea of red across Asian and European stocks too. The dollar popped higher, sending the euro and yen tumbling awkwardly hard, and US government bonds weakened, sending the yield on 10-year Treasuries forcefully above 4.5 per cent.

The Fed chair is facing some flak here. His comment in the post-meeting press conference that the year-end projection for inflation has “kind of fallen apart” is not the sort of self-assertion that investors seek in a Fed chair, and the pick-up in some inflation measures comfortably predates the reinauguration of Trump.

But markets are going through the wringer in no small part because the consensus among investors about the next steps for markets had become so intense — curdling hard around the themes of American exceptionalism in stocks and the vanquishing of inflation keeping bonds well supported. The path to an easy run in markets in 2025 had become exceptionally narrow and extremely crowded with like-minded views, and it has taken only a gentle push from the Fed to tip that out of balance.

The annual spectacle of year-ahead market outlooks from the big banks and asset managers demonstrated a near-unanimous set of views. Deutsche Bank is towards the top of the pack with its assessment that the benchmark S&P 500 index of heavyweight US stocks will ascend to 7,000 by the end of next year. After the overnight shock, that projection is 20 per cent above where we are now. It is punchy, but not wildly out of line. Core fundamental differences of opinion are hard to find. “The degree of uniformity in year-ahead projections has broken all previous records,” notes TS Lombard’s Dario Perkins.

The trouble with that was two-fold. First, it meant much, if not all, of the narrative was already baked in. Second, crowding around core themes tends to exaggerate the scale of market reactions when stuff goes wrong. Enter Powell stage left.

“Everyone’s portfolio is pointed towards US exceptionalism,” said Mike Riddell, a portfolio manager on Fidelity’s Strategic Bond Fund, speaking with some foresight the week before the Fed decision. “The consensus can be right, and we don’t see much to derail it. But if you see anything to move the narrative, you can get really violent market moves.”

We have been here before, in a range of different markets, but that does not prevent investors from making the same mistake over and over again. This time last year, Powell caught the market off guard in the opposite direction, dropping a hint of interest rate cuts that investors went on to exaggerate hugely out of proportion.

Crowded bets among investors also stung in early August, when a downbeat US labour market report blasted in to several popular and correlated market bets. In late September, deeply unloved Chinese stocks rocketed higher after Beijing unleashed stimulus measures to try and turn the hobbled economy and markets around. Investors had given China such a wide berth that stocks leapt 40 per cent in just a few days as funds piled in to a narrow entrance.

The latest ructions are a useful reminder that despite the disarming simplicity of the American exceptionalism theme, rakes are scattered all over markets for investors next year.

The assumption that the US economy will sail through the first year of Trump 2.0 is brave. Ignoring the (actually pretty obvious) banana skins, particularly around inflation, is “the ultimate ‘trust me’ trade” says Greg Peters, co-chief investment officer for PGIM Fixed Income. “It seems off to me.”

Now, investors should not assume that the Christmas holiday season will put all this angst to bed. As the final days of 2018 showed, portfolios can and do shake around wildly even when a lot of core markets are shut, on half-days, or on the go-slow. If anything, thinned-out trading volumes at this time of year can make matters worse. 

Some fund managers will be feeling sore about this year-end beating. But Powell has done us all a favour in reminding us that next year will not be for the faint of heart, and the wisdom of crowds is not always your friend.

katie.martin@ft.com

Tributes have been paid to the two victims who died in the shooting at the Abundant Life Christian School in Madison, Wisconsin, on Monday, who have been named as 42-year-old teacher Erin M. West and 14-year-old student Rubi P. Vergara.

The Dane County Medical Examiner’s office confirmed their identities in a press release Wednesday night, while in a separate statement, the school said, “our hearts are heavy with these losses.”

The suspected shooter, 15-year-old Natalie Rupnow, a freshman at the school who was also known as Samantha, died on the way to hospital on Monday from an apparent self-inflicted gunshot wound, police said.

“ALCS is a better school for the work of Erin West. She brought her love of Jesus and love of people to our staff and school family all wrapped in a hug and topped with a smile,” the school’s statement said.

The school said West worked as a substitute teacher for three years before taking a full-time staff role as an in-house substitute teacher and coordinator, “a role tailor made for her abundant skills and breadth of knowledge.”

“She served our teachers and students with grace, humor, wisdom, and — most importantly — with the love of Jesus. Her loss is a painful and deep one and she will be greatly missed not just among our staff, but our entire ALCS family,” the statement added.

Rubi Vergara, a 9th grade student, had been at the school since kindergarten and was described as popular and a keen volunteer.

“Her gentle, loving, and kind heart was reflected in her smile. Rubi was a blessing to her class and our school. She was not only a good friend, but a great big sister,” the school said.

“Often seen with a book in hand, she had a gift for art and music. Yet, it was Rubi’s love for Jesus that shined brightest and she shared His love with others by volunteering faithfully. She will be missed deeply by her teachers and fellow students,” the statement added.

An online obituary uploaded to a local funeral home website said Vergara loved art, singing and playing keyboard in her family’s worship band. “She shared a special bond with her beloved pets, Ginger (cat) and Coco (dog),” the obituary said.

The funeral home said a service for Vergara would be held on Saturday at 11 a.m. CST (12 a.m. ET) and would be livestreamed online.

The police investigation into the shooting continues. Authorities said Wednesday night that the two unidentified students who received life-threatening injuries remain in a local hospital, while the four people who were treated in hospital for minor injuries sustained in the shooting have been discharged.

Police said that the shooter opened fire in a second-floor classroom “during a study hall for mixed graders.”

Two guns were found at the school, but only one was used in the shooting, police said.

Police said they were working to establish a motive and said they were aware of the suspect’s alleged social media activity and “documents and photos circulating the internet,” that have yet to be verified.

Detectives want to speak to any who may have interacted with Rupnow in the days or weeks before the shooting — they can contact police anonymously through Madison Area Crime Stoppers at p3tips.com or by calling 608-266-6014.