Tech Stocks Drag Markets Lower After Fed Keeps Rates Unchanged

On Wednesday, tech stocks led a market decline as the broader market sentiment remained cautious following the Federal Reserve's decision to keep its benchmark interest rate unchanged in a range of 4.25%-4.5%.

The announcement from the Federal Reserve, which was made at 2:00 p.m. ET, prompted a decline of more than 0.8% in the Nasdaq Composite (^IXIC), erasing some of the gains made during Tuesday's rebound. The broader S&P 500 (^GSPC) fell by approximately 0.6%, while the Dow Jones Industrial Average (^DJI) lost 0.3%.

In its Wednesday statement, the Federal Reserve notably removed language from its December statement indicating progress towards its goal of reaching 2% inflation, simply stating that "Inflation remains somewhat elevated." Investors now eagerly await answers to two crucial questions during Fed Chair Jerome Powell's press conference: How much further will the Fed cut rates, and has the central bank adjusted its stance in light of President Trump's recent tariff actions?

Nvidia Continues to Weigh on Tech Sector, ASML Gains

Beyond Fed policy, Nvidia (NVDA) once again pressured the tech sector on Wednesday, with its stock falling by more than 6% after Bloomberg reported that the Trump administration was considering additional restrictions on its chip exports.

Meanwhile, a surprising increase in bookings for ASML (ASML), a critical toolmaker in the AI chip supply chain, provided a further boost to tech stocks, which were attempting to recover from a challenging start to the week. In early trading, shares of ASML rose by 5%, and peers such as Applied Materials (AMAT) also made gains.

Investor Focus Shifts to AI Spending and Earnings

Markets are now taking a more cautious approach to Chinese startup DeepSeek's challenge to assumptions about AI spending and expenses. Shares of Alibaba (BABA) climbed by more than 4% after the Chinese tech giant introduced a new AI model that it claims surpasses DeepSeek's ChatGPT competitor. Microsoft-backed (MSFT) OpenAI added to the narrative by accusing DeepSeek of utilizing its exclusive models to train its rival.

After the close on Wednesday, Meta (META) and Microsoft's quarterly results will draw attention, offering reassurance that Big Tech's significant AI investments will translate into growth. Tesla (TSLA) rounds out Wednesday's megacap earnings, with Wall Street anticipating a new catalyst to stimulate the stock's performance.

Fed Chair Powell Addresses Market Concerns

In Wednesday's Yahoo Finance Morning Brief newsletter, a chart from Dynamic Economic Strategy CEO John Silvia was highlighted, indicating that the unemployment rate is hovering near the level projected by the Fed for this year, while private payroll growth has slowed. Silvia argued in the fourth volume of Yahoo Finance's Chartbook that this dynamic likely provides the Fed with limited room for significant rate adjustments in either direction.

During his address, Fed Chair Jerome Powell specifically discussed this trend, emphasizing that it often suggests a "stable level" in the labor market and that it is "not overheated anymore." "The labor market appears to be fairly stable and largely in balance when you have an unemployment rate that has been relatively consistent for a full six months," Powell stated.

Powell also highlighted moderating shelter inflation as "further progress" towards the Fed's 2% target, citing the recent slowdown observed in owner's equivalent rent and housing services. These factors are included in the Personal Consumption Expenditures index (PCE), the Fed's preferred measure of inflation. "We're seeing that decline quite steadily now," Powell said. "And that's where most of the remaining gap remains."

Powell acknowledged that economic forecasts are inherently uncertain, but he emphasized that the current situation carries some elevated uncertainty due to the anticipated policy shifts in areas such as tariffs, immigration, fiscal policy, and regulatory policy. "In the current situation, there is likely some increased uncertainty due to the substantial policy changes in those four areas that I mentioned," Powell stated. "So there is likely some additional uncertainty. However, it should be temporary. We should navigate through it and return to the normal level of uncertainty."

Powell also responded to a question about changes made to the Fed's statement, clarifying that they were intended as "language cleanup" rather than an indication of a lack of confidence in inflation's continued decline. "Markets have overreacted to the minor statement revisions," stated Samuel Tombs, chief US economist at Pantheon Macroeconomics, in an email. "Inflation is now simply reported as remaining 'somewhat elevated,' whereas previously it was said to have 'made progress towards the Committee's 2 percent objective,' but we doubt that reflects disappointment on the Committee about recent data. The CPI and PPI data for December suggests that the average core PCE inflation for Q4 will match the FOMC's December forecast of 2.8%."

Powell denied having any contact with President Trump regarding his request for an immediate interest rate cut. "I have not had any contact [with the President]," Powell stated. "I'm not going to have any response or comment whatsoever on what the President said. It is inappropriate for me to do so. The public should be confident that we will continue to do our work."

Market Reaction to Fed Policy

The Federal Reserve's decision to maintain interest rates was widely predicted, but the removal of the phrase "progress" from the FOMC statement concerning inflation raised concerns that the central bank may be leaning more hawkish than in previous meetings.

According to the CME FedWatch tool, traders now believe the Fed will likely keep interest rates consistent through its May gathering, with a probability of approximately 60%. A day earlier, traders had predicted a 50/50 chance of a rate cut at the May meeting. Following the announcement, all three major indexes experienced declines, with the Nasdaq Composite (^IXIC) dropping by more than 1%, the S&P 500 (^GSPC) shedding roughly 0.8%, and the Dow Jones Industrial Average (^DJI) losing 0.5%.