CNBC Daily Open: Expectations on Fed cuts were the lethal blow to markets

This report is from today's CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

What you need to know today

A cut now, but fewer ahead
The U.S. Federal Reserve lowered interest rates by 25 basis points on Wednesday, taking its overnight borrowing rate to a target range of 4.25%-4.5%. In the Fed's dot plot indicating expectations for rates in the years ahead, the central bank mostly indicated just two rate reductions for 2025, fewer than the four cuts previously projected in September.

Sharp sell-off in markets
U.S. markets sold off sharply on Wednesday. The Dow Jones Industrial Average lost more than 1,000 points, dropping 2.58% for its 10th straight day of losses. The S&P 500 retreated 2.95% and the Nasdaq Composite sank 3.56%. The pan-European Stoxx 600 — which ended trading before the Fed's decision — added 0.15%.

Shares of Tesla reverse
Tesla shares slumped 8.3% Wednesday, their steepest fall since Donald Trump won the U.S. presidential elections in November, amid heavy losses in the broader market. While shares are still up 75% since the elections on Nov. 5, the company's stock seems "widely disconnected … from fundamentals," Barclay analysts wrote in a report on Wednesday.

Disappointing guidance from Micron
Shares of Micron plunged more than 15% in extended trading after the company gave substantially weaker-than-expected guidance, even though it beat expectations on earnings for its last quarter. For the current quarter, Micron expects revenue to come in around $7.9 billion. That's far less than the $8.98 billion expected by analysts, according to LSEG.

[PRO] Why markets were so disappointed
The stock market took a battering after digesting the Fed's forecast that monetary policy in 2025 will remain tighter than previously forecast. CNBC's Sarah Min looks at why investors were so disappointed, and what market observers think about the Fed's decision.

The bottom line

Wednesday's dramatic sell-off in markets is a stark reminder that forecasts influence stock movements much more than current circumstances.

The Fed cut its key interest rate by 25 basis points. Borrowing costs will go down and corporate investment should be stimulated, which should lead to job creation and boost growth. That, in turn, theoretically pushes up stocks. 

 But investors were already confident about the Fed's cut Wednesday. Prior to the conclusion of the Fed's December meeting, the futures market indicated a 98% chance of a 25 basis points cut, according to the CME FedWatch Tool. That means investors had already priced in the benefits of the rate reduction into stocks. In other words, yesterday's cut would have little bearing on stock prices.  

Investors were perhaps already pricing in more than a single reduction in rates. On Tuesday, investors were betting on a 16.8% chance of the Fed lowering rates to 4%-4.25% in January.

Fed Chair Jerome Powell dashed those hopes.

"With today's action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive," Powell said at his post-meeting news conference. "We can therefore be more cautious as we consider further adjustments to our policy rate."

The possibility of a 25 point cut next month dwindled to 8.6%, according to the futures market, after the Fed released its updated dot plot indicating only two cuts for 2025.

It's this shift — from hopes that the Fed will go full throttle with cuts to the reality that it might even lift its foot off the accelerator – that is sending tremors through the markets.

To put it another way: It's like waking up in anticipation of a present on Christmas day, only to find yourself bereft of gifts. That disappointment wouldn't happen at any other time of the year.

As David Russell, global head of market strategy at TradeStation, glumly noted, "Good-bye punch bowl. No Christmas cheer from the Fed."

— CNBC's Daria Mercado, Jeff Cox, Yun Li, Brian Evans and Lisa Kailai Han contributed to this report.        

Correction: An earlier version of this report misstated the probability of a rate cut in January.