4:14pm: More rate increases could come next month, Fed suggests
The Dow closed Wednesday up 304 points, 1%, at 30,669, the Nasdaq Composite jumped 271 points, 1.5%, to 11,099, and the S&P 500 added 55 points, 1.5%, to 3,790.
Markets reacted largely positively to the Fed’s announcement that it would be raising the interest rate by 75 basis points. The Dow slipped briefly into the red around the time of the announcement but then surged back into positive territory. The 75 bps increase is the largest since 1994.
Fed Chairman Jerome Powell indicated that a similar increase could follow when the Fed meets in July.
“Today’s announcement confirms the Fed’s commitment to fight the inflation battle more aggressively despite the potential aftermath from raising rates at such a rapid pace,” said Allianz Investment Management’s Charlie Ripley, as reported by CNBC. “Overall, Fed policy rates have been out of sync with the inflation story for some time and the aggressive hikes from the Fed should appease markets for the time being.”
The Boeing Company was among the leaders Wednesday, as its stock jumped more than 9% to $133.70.
2.15pm: Investors digest Fed announcement
US stocks pared gains made earlier today following the Fed’s announcement that it would be raising the interest rate by 75 basis points – the largest single-meeting increase since 1994.
The Dow, S&P 500 and Nasdaq remained in positive territory after the Fed's decision was revealed but all three declined, up 0.2%, 0.5%, and 0.9% respectively, compared to gains of 0.8%, 1%, and 2.4% just prior to the 2.00pm EDT announcement.
In a statement, the Fed reiterated its commitment to returning inflation to its 2% objective.
“Overall economic activity appears to have picked up after edging down in the first quarter,” the committee said. However, the committee noted the invasion of Ukraine by Russia was causing tremendous human and economic hardship and that COVID-related lockdowns in China were likely to exacerbate supply chain disruptions.
IG chief market analyst Chris Beauchamp said that the market seemed stricken by indecisiveness in the wake of the decision.
“Having essentially telegraphed a 75 basis points rise by an impressive series of leaks, nods and winks, the Fed delivered on these expectations,” he said.
“Everything still seems to be teetering on a precipice – today’s gains in stocks are holding, if only just, but could vanish in an instant should Powell display his more-hawkish plumage later on.”
AJ Bell head of investment analysis Laith Khalaf said investors could expect further thrills and spills in markets as they digest the end of the era of cheap money.
“The S&P 500 is now in bear market territory, so it’s evident that investors are beginning to think the unthinkable, that monetary policy might actually stand a chance of reaching levels last seen prior to the financial crisis,” Khalaf said.
12.05pm: Aggressive Fed decision expected
US stocks remained in positive territory at noon with investors wary of what’s to come as the Fed is set to reveal its latest monetary policy decision this afternoon.
At midday, the Dow was up 193 points at 30,558 points.
The S&P 500 had gained 40 points at 3,776 points while the Nasdaq was up 199 points at 11,028 points.
OANDA senior market analyst Craig Erlam said it had become clear that central banks were going to have to be very aggressive in countering mounting price pressures around the globe.
"Stagflation is not yet here but the risks around it have risen considerably in recent months which makes central bank responses all the more critical," Erlam said.
Erlam said markets were now almost fully pricing in a 75 basis point hike and another in July with the rate hitting 3.5 to 3.75% in December.
"A soft landing is looking increasingly unlikely as well, with recession indicators starting to flash as interest rate expectations are raised," he said.
Meanwhile, US retail sales softened in May, falling 0.3% month-on-month, while April was revised down to 0.7% from 0.9%.
ING chief international economist James Knightley said despite softening demand, consumer spending could still grow strongly in the second quarter given a greater focus on services such as leisure and entertainment.
He noted the second half of the year would be more challenging amid rising borrowing costs, falling equity markets and household wealth, and concerns about the housing market.
"For spending to continue growing strongly we will need to see households run down their savings or accumulate debt at an even faster rate, which we increasingly doubt will happen," Knightley said.
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9.35am: All eyes on the Fed
US stocks opened higher with cautious trading expected ahead of the Fed’s interest rate decision due this afternoon.
At the open, the Dow had gained 243 points at 30,608 points.
The S&P 500 was up 35 points at 3,770 and the Nasdaq had jumped 114 points at 10,943 points.
Evelyn Partners associate director of investment strategy David Goebel said futures markets were signalling that the Fed would increase the interest rate by 75 basis points, with some chance of even a 100 basis point increase.
“Our view is that a move of 100 basis points could be so large as to open the committee to accusations of panic and is therefore unlikely,” he noted. “However, the Fed will be keen to look tough in the face of historically high headline inflation, and we, therefore, think they will deliver on market expectations of a 75 basis points increase.”
A 75 basis point increase would be the largest interest rate hike since 1994.
6.25am: 75bp or more?
US markets were expected to open higher on Wednesday as investors look to the US Federal Reserve interest rate decision due at 2.00pm ET.
Markets have scaled up rate rise expectations following recent data, with a 75-basis point rate increase now widely expected amid signs that inflation has yet to peak, causing the Fed to move more aggressively.
Futures for the Dow Jones Industrial Average rose 0.7% in pre-market trading, while those for the broader S&P 500 added 0.7%, and contracts for the Nasdaq-100 were up 0.8%.
“Investors know that the Fed will want to get more aggressive on the back of a difficult-to-ease inflation, and yesterday’s producer data came as another confirmation that inflation has more to inflate in the coming months,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. “At this point, the decision of a 75bp is almost made, the Fed should only confirm the market verdict.”
If the Fed chooses to stick to another 50 basis point hike, the market will certainly rebound on relief, she said but noted that the Fed’s primary goal is to tame inflation right now, and not to boost the equity markets.
“Now that the 75 basis point pill has been swallowed by the market, it would be irrational for the Fed not to go ahead with a bigger hike,” Ozkardeskaya noted.
Until the rate verdict is announced, however, trading is expected to be cautious.
The Fed’s economic projects and path for key short-term rates, the so-called dot plot, will also be eagerly awaited.
But given that stocks have dropped so much even a hawkish surprise in economic and dot plot projections, might not damage equities too much, said Ozkardeskaya.
Equity markets have had a rough ride over recent weeks with the S&P 500 index falling into bear market territory - down 20% from the start of the year - signalling that more falls may be coming.
Headline US inflation data last week showed an unexpected spike to a 41-year high and spooked markets, leading to widespread stock market falls. Investors are worried that elevated inflation and the Fed’s aggressive rate hikes will crimp economic growth.
In energy markets, WTI crude oil futures fell 1.3% to $117.44 a barrel and Brent crude futures lost 1.1% to $119.85.
Contact the author at jon.hopkins@proactiveinvestors.com