Jerome Powell just showed Donald Trump who his boss is

CNN New York —

President-elect Donald Trump's favorite barometer of his success, the stock market has been buzzing since his re-election. Promises of deregulation and business-friendly tax cuts have excited investors, eager to unlock profits and easy money. And then reality set in this week.

But Federal Reserve Chairman Jerome Powell, at a news conference Wednesday, reminded markets who's boss: The Fed said inflation would remain higher than expected next year and that it now anticipates only two rate cuts in 2025, instead of the four it had planned over the next year. its previous screening in September.

Stocks plunged on the news, with the broader S&P 500 index falling 3%. The Dow lost more than 1,100 points, falling for the 10th consecutive session, the longest losing streak since 1974.

The strong market reaction shows that the Fed, ultimately, could weigh more heavily on markets than Trump's policies in the future.

The Fed's projections on rates and inflation were like a gut punch to the market, said Art Hogan, managing director and chief market strategist at B. Riley Investments.

It scared everyone, he added.

And suddenly, the post-election stock market rally was almost entirely erased. The Dow, which had risen nearly 2,800 points since Election Day before its epic slide began, ended Wednesday with a total gain of just 100 points since Trump's re-election.

Although the Fed on Wednesday announced the long-awaited quarter-point cut that investors had been counting on, traders were shocked by central bankers' forecasts for 2025. For markets, fewer rate cuts could mean profits lower than expected, less hiring and a weaker economy than expected.

But wait, wasn't Trump's victory supposed to be the holy grail that would ignite Wall Street for the next four years with tax cuts and deregulation galore? Not so fast.

Powell just reminded us that nothing in life is easy, Callie Cox, chief market strategist at Ritholtz Wealth Management, told CNN, referring to the stock market's recent gains.

It's always been difficult to fully trust the recovery we saw in the markets after Election Day, she said. To a large extent, it seemed like investors were dismissing much of the context and simply taking what they wanted from the political speculation.

But lately, some of the euphoria around what Trump could offer investors has dissipated somewhat, she added.

Now the focus is shifting to reality: how his policy proposals, including across-the-board tariffs, could negatively impact the economy and how the Fed should respond accordingly.

New inflation forecasts show that last mile will take longer, Hogan said.

To be fair to investors, one part of the market predicted this scenario even before the Fed: the bond market. Treasury yields rose as bond prices fell in the weeks before Trump's re-election. And since then, the returns have been ever higher.

Indeed, Trump's tariff and mass eviction policies could drive up inflation, bringing an abrupt end to the Fed's rate-cutting campaign. Yields also rose as Trump promised more tax cuts and deficit spending, which could flood the market with new Treasury bonds to help the new Trump administration borrow the money it needs to finance its initiatives.

Of course, stock investors knew all this. They were simply holding out hope that the stock market rally would continue for as long as they could.

Instead of delaying the sell-off until early 2025, investors decided it might be better to start taking profits now, said Sam Stovall, chief investment strategist at CFRA Research. FOMO (fear of missing out) usually ends up being the worst enemy of wallets.

Stocks are expected to rebound somewhat on Thursday. The epic losing streak may be coming to an end. But investor sentiment appears to have come back to earth. In the future, they will probably pay more attention to the Fed than to Trump.

The Fed wields the power to move markets like no other institution in America, said Rob Haworth, senior investment strategist at US Bank Wealth Management.

It's as if Powell said to Trump on Wednesday: I'm in charge.

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