4.10pm: Powell needs more convincing that inflation is heading south
US markets closed sharply lower after the Federal Reserve chairman Jerome Powell signalled more data was needed before the central bank would meaningfully change its view of inflation.
At the close the Dow Jones Industrial Average was down 143 points, or 0.42%, to 33,966. the S&P 500 fell 24 points, or 0.61%, to 3,995 and the Nasdaq Composite dipped 86 points, or 0.76%, to 11,171.
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Powell said.
Powell’s comments came after the Fed increased interest rates by 50bps, as expected, to a target range of 4.25% to 4.5% - the highest level since early 2008.
But in the announcement accompanying the rate rise, officials said ongoing increases "will be appropriate" in order to help bring inflation down to the Fed's target level.
Fed officials also forecast raising rates to 5.1% before it ends this hiking cycle and also forecast that it would keep rates higher through 2023, with no reductions until 2024.
ING Economics said “This relative hawkishness likely stems from concern that the recent steep in Treasury yields and the dollar are undermining the Fed’s interest rate hikes by loosening financial conditions – the exact opposite of what the Fed wants to see as it battles to get inflation lower.”
“While the market may view inflation as being in its death throws, the Fed certainly does not.”
“For the Fed to relax it will want to see substantial evidence that inflation is slowing, not just one or two months where core inflation has come in less than the market was expecting.”
“Given this situation, we remain happy with our call for a further 50bp rate hike at the 1 February Federal Open Market Committee meeting” ING commented.
Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management, said: “It’s become clear this year that the Fed is intent on crushing inflation and future expectations of inflation.”
“The higher interest rate environment required to tame inflation comes at the cost of economic growth, which likely comes at the cost of lower stock markets. The adage of ‘Don’t fight the Fed’ has been around for many years and will remain as relevant as ever in 2023.”
George Lagarias, Chief Economist at Mazars said: “markets seem convinced that the ‘pivot’ towards more accommodation is in hand. It is not.”
“The ‘pivot’ is in fact drawing away, as pressures from bond markets abate and the financial system is proving resilient. Meanwhile, China’s rapid reopening poses a clear risk for the benign inflation outlook narrative the market seems to espouse.”
2.30pm: Santa rally on hold as Fed signals further rate rises
US equity markets fell sharply after the Federal Reserve raised its benchmark policy rate by 50bps but left the door open for additional hikes next year despite signs the battle against inflation is being won.
At 2.30pm the Dow Jones Industrial Average was down 91 points at 34,017, the S&P 500 was 15 points lower at 4,005 and the Nasdaq Composite declined 63 points to 11,194. All three indices had been higher ahead of the decision.
At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it would raise the federal funds rate by 50 basis points, as expected, to a target range of 4.25% to 4.5% - the highest level since early 2008.
But in the announcement accompanying the rate rise, officials said ongoing increases "will be appropriate" in order to help bring inflation down to the Fed's target level.
Fed officials also forecast raising rates to 5.1% before it ends this hiking cycle and also forecast that it would keep rates higher through 2023, with no reductions until 2024.
John Leiper, CIO of Titan Asset Management said: “The unanimous vote for a widely expected 50bps rate hike masks a hawkish tone to the Fed statement which retained the word ‘ongoing’ in reference to future rate hikes, which some felt might be dropped, and the revised dot plots which point to a median forecast of 5.1% in 2023, above the 4.75% – 5% priced in by markets.”
“Equities are responding accordingly, selling off on the news. Forget the Santa rally… the Fed looks more like the grinch this Christmas.”
12.05pm: Dow sees third-straight day of gains
US stocks gained ground in noon trading as investors await an expected 50 basis-point rate hike from the Federal Reserve after four consecutive 75 basis point increases.
At midday, the Dow gained 193 points to 34,301, while the S&P 500 added 21 points at 4,041 and the tech-heavy Nasdaq climbed 61 points to 11,318.
“This is one of the last major data points that we will see to define the 2022 capital markets,” US Bank Wealth Management’s Bill Northey said.
“So, investors will remain very focused on the new projection materials provided by the Federal Reserve … and importantly, the appropriate monetary policy given that set of circumstances through calendar 2023,” Northey added.
Notable movers included shares of Moderna Inc, which climbed 10% following a 20% gain on Tuesday, after the pharmaceutical giant revealed promising data on its cancer treatment.
9.35am: Stocks in positive territory ahead of Fed’s rate decision
US stocks inched higher at the open on Wednesday as traders eagerly awaited the outcome of the Fed’s December rate-setting meeting due this afternoon.
Just after the market opened, the Dow Jones Industrial Average had added 76 points or 0.2% at 34,185 points, the S&P 500 was up 9 points or 0.2% at 4,028 points, and the Nasdaq Composite had gained 19 points or 0.2% at 11,271 points.
Forex.com market analyst Fiona Cincotta said a 50-basis point rate hike was priced in, with investors more concerned over what signals policymakers could give about 2023 and when interest rate hikes could stop.
“Let’s not forget that inflation is still 3.5 times the Fed’s 2% target,” Cincotta said.
“Any signs that the Fed’s terminal rate is forecast to be over 5% would suggest that the Federal Reserve will hike interest rates for longer, which could drag stocks lower and boost the US dollar.”
She continued: “On the other hand, should the Fed downwardly revise its quarterly inflation forecast, the market could interpret this as a move towards a dovish pivot, which could lift stocks higher while pulling treasury yields and the US dollar lower.”
6.30am: All eyes on Fed's rate decision
Wall Street is expected to open down as traders hold back from taking positions ahead of the outcome of the two-day rate-setting meeting of the final Federal Open Market Committee (FOMC) of 2022.
Futures for the Dow Jones Industrial Average fell 0.2% in Wednesday pre-market trading, while those for the broader S&P 500 index shed 0.2% and contracts for the Nasdaq-100 declined by 0.3%.
Markets came off their best levels but still closed higher on Tuesday after softer-than-expected inflation data for November raised expectations that the Fed will contain any increase in interest rates to 50 basis points after hiking rates by 75 basis points at each of its last four meetings.
The Dow Jones ended 0.3% higher on Tuesday at 34,109, while the S&P 500 rose 0.7% to 4,020 and the Nasdaq advanced 1% to 11,257.
“Following yesterday’s downside surprise in US inflation, traders now eagerly await the FOMC later today,” commented James Harte, market analyst at TickMill Group. “Initial excitement in risk markets was quickly tempered yesterday suggesting that plenty of caution still remains with regard to the Fed’s outlook.”
Harte noted that Federal Reserve chair Jerome Powell has been keen to stress a willingness to avoid abandoning rate hikes too early, something the market has also heard from several Fed members recently.
“With that in mind, the Fed seems likely to try and strike a more balanced tone, acknowledging a welcomed downturn in inflation but the need to keep hiking rates into next year in order to bring prices down sustainably,” Harte added.