By Medha Singh and Purvi Agarwal
(Reuters) - The S&P 500 and the Nasdaq dipped on Friday as fears over high interest rates next year loomed, although a cooler-than-expected inflation report kept losses in check.
A Commerce Department report showed the Personal Consumption Expenditure (PCE) index, the Fed's preferred inflation measure, rose 2.4% in November on an annual basis, below estimates of 2.5%, as per economists polled by Reuters.
After the data, traders raised their rate cut bets for 2025, now expecting a rate cut first in March and then again by October. Before the data, there was about 50% chance of a second rate cut by December 2025.
Wall Street was jolted this week after the Fed forecast only two rate reductions in 2025 and raised its inflation estimate, in a nod to the economy's continued resilience and still-high inflation.
"Before that Fed meeting, inflation wasn't as much of a concern and then the Fed told us that we don't think we've won that battle yet," said Mike Dickson, head of research and quantitative strategies at Horizon Investments.
"We have a lot more of balance between a healthy labor market and their (the Fed's) concern for inflation. That makes this report a little more important than it was."
At 9:43 a.m. ET, the Dow Jones Industrial Average fell 3.46 points, or 0.01%, to 42,338.78, the S&P 500 lost 14.32 points, or 0.24%, to 5,852.76 and the Nasdaq Composite lost 127.04 points, or 0.66%, to 19,245.73.
Most megacap and growth stocks were lower with Tesla (NASDAQ:TSLA) off 2.6% and Nvidia (NASDAQ:NVDA) and Amazon.com (NASDAQ:AMZN) down over 1% each.
Consumer discretionary and information technology were the biggest sectoral decliners with an over 0.7% loss each.
Meanwhile, the U.S. Congress was scrambling to avert a partial government shutdown before a midnight deadline, after more than three dozen Republicans rejected a demand by President-elect Donald Trump to use the measure to lift the nation's debt ceiling.
"Potentially eliminating the debt ceiling is going to put some upward pressure on interest rates that played a bit of a role into how everything is trading," Dickson said.
San Francisco Federal Reserve Bank President Mary Daly said this week's decision to lower interest rates was a "close call," and echoed Chair Jerome Powell's view that caution is now warranted toward future moves.
The Nasdaq was set to fall for the first time in five weeks and the S&P 500 was on pace for its worst week since September. The Dow was on track for its sharpest weekly fall since March 2023.
FedEx (NYSE:FDX) jumped 3% after announcing the much-anticipated spinoff of its freight trucking division, as it restructures operations to focus on its core delivery business.
Eli Lilly (NYSE:LLY) advanced 6.4% after Danish rival Novo Nordisk (CSE:NOVOb)'s experimental next-generation obesity drug achieved lower-than-expected weight loss in a late-stage trial.
Advancing issues outnumbered decliners by a 1.44-to-1 ratio on the NYSE and by a 1.19-to-1 ratio on the Nasdaq.
The S&P 500 posted no new 52-week highs and 21 new lows, while the Nasdaq Composite recorded 12 new highs and 150 new lows.