(Bloomberg) — Almost exactly a year after sparking a sharp rally in financial markets, Federal Reserve Chairman Jerome Powell did just the opposite on Wednesday, announcing a cautious assessment of interest rate cuts in 2025 that would Investors were amazed.

Most read by Bloomberg

Stocks fell 3% and bonds also fell, pushing benchmark 10-year Treasury yields to their highest in seven months. By the time Powell finished his speech, about 90 minutes after the Fed announced its third straight rate cut, the selloff was its worst single-session selloff since the start of the pandemic and the message was clear: It continues, risk-taking the rally of the past more than two years is suddenly in danger.

The turmoil is evidence of how markets have relied on steady monetary easing to boost asset prices. Now, with officials predicting just two rate cuts in the next 12 months, those hopes have all but been dashed, leaving investors to pick up the pieces and figure out where to go from here.

“Markets were unprepared for this Fed announcement,” said Tom di Galoma, head of fixed income at Curvature Securities. “Powell is moving to neutrality and waiting for the next administration to push its agenda and then see what he might have to do.”

Of course, Powell’s comments about a “new phase” of monetary policy during Wednesday’s press conference were not a complete surprise. Economic data points to a robust U.S. economy while inflation remains stubbornly above the Fed’s 2% target. In the $29 trillion U.S. bond market, traders had pushed up 10-year Treasury yields by about 75 basis points since the central bank first began cutting interest rates in mid-September.

But even they were surprised at how close officials appeared to be to the end of their cycle of cuts.

The swap market now implies fewer than two quarter-point cuts for all of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday. In the options market tied to the Secured Overnight Financing Rate, a large block trade placed Wednesday afternoon is even expected to benefit from the start of another rate hike cycle next year.

“It sounds like the Fed is taking a very conservative path,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co. “Inflation has proven more resilient than they thought, and the political dynamics ahead have Short-term forecasts increased. “Difficulties.”

Of course, both the Fed’s and the market’s outlook must be viewed with a degree of flexibility. President-elect Donald Trump, who will return to the White House in just over a month, has vowed to raise tariffs on key U.S. trading partners and cut taxes – both measures that economists say have the potential have to stimulate inflation.

The story continues