4.10pm: US markets tumble as Fed fight with inflation continues
US markets ended a see-saw final couple of hours sharply lower as the Federal Reserve signalled that interest rates would stay higher, for longer, and slashed its forecasts for economic growth for the next two years.
The rate increase of 75bp was as expected but it was the accompanying hawkish remarks and estimates that further spooked the markets.
At the close, the Dow Jones was down 523 points, or 1.7%, at 30,184, the S&P 500 shed 66 points, or 1.7%, to 3,790, and the Nasdaq Composite tumbled 205 points, or 1.8%, to 11,200.
Wells Fargo said “The FOMC further stepped up its inflation-fighting game in September” delivering “a more hawkish projected path for short-term rates through this year and next.”
“The stricter policy stance expected by the FOMC comes as the Committee sees above target inflation as becoming increasingly entrenched” with FOMC members now expecting core personal consumer expenditure inflation to remain above 3% through next year and above 2% all the way through 2025.
“All told, the Committee appears to be inching toward our own view that it will take a mild recession to get inflation firmly back to the 2% target” Wells Fargo said.
3.30pm: Powell says FOMC remains strongly resolved to cut inflation
Speaking at his post-meeting news conference Federal Reserve chairman Jerome Powell said:.“My main message has not changed since Jackson Hole”
“The FOMC is strongly resolved to bring inflation down to 2.5%, and we will keep at it until the job is done.”
He added that so far there’s only modest evidence that the labor market is cooling off, citing a slight decline in job openings, that quits are off their all-time highs and that payroll gains have moderated but only by a little bit.
“No one knows whether this process will lead to a recession or if so how significant that recession would be” he said adding “That’s going to depend on how quickly wage and price inflation pressures come down, whether expectations remain anchored and also if we get more labor supply.”
He noted that the chances of a soft landing will diminish if policy needs to get more restrictive for the Fed to reach its goal of 2% inflation. However, high inflation would inflict greater pain long term, he said.
2.50pm: Rates seen rising further than previosuly forecast and for longer
US markets were in a volatile frame of mind after the rate decision moving back into positive territory after initially diving in the immediate aftermath of the news.
The Dow Jones Industrial Average is now up 91 points at 30,797, the S&P 500 is up 51 points at 3,907 and the Nasdaq Compositie has risen 165 points to 11,590.
Analysts noted it was the predictions regarding the future path of interest rates, rather than the increase itself, that initially spooked the markets.
Anna Stupnytska, global macro economist at Fidelity International said “Without delivering the full 100bp, the Fed still managed to outhawk the markets - through the September dot plot” reinforcing Powell's hawkish message at Jackson Hole.
She added “The long-awaited central bank 'pivot' now seems further away - until we see strong hard data evidence of monetary policy tightening transmitting to the real economy, the Fed will continue on its hiking path.”
However, she noted “that if financial conditions tighten significantly, we may well see an earlier pause” although “we are far from that right now and uncertainty remains very high.”
Simon Harvey, head of FX analysis at Monex Europe, agreed saying: “Given the decision largely fell in line with expectations, the market reaction was focused on the accompanying economic projections, specifically the Fed’s dot plot.”
The Fed's dot plot is a chart that records each Fed official's projection for the central bank's key short-term interest rate and today the median dot plot for the end of the year was raised from 3.4% to 4.4% which Harvey said suggests another 125bps of rate rises over the next two meetings.
Harvey pointed out that the 2023 median is now 4.6%, an 80bps increase from June’s projections.
“Further out along the curve, the Fed’s messaging of restrictive rates for longer is evident, as the 2024 median dot was raised from 3.4% to 3.9%, while the newly incorporated 2025 projection suggests only 1.7 percentage points of interest rates will be unwound from next year’s peak over the following two years” he said.
Harvey said the overall message was clear “The Fed wants to keep financial conditions tight, even at the expense of signalling overtightening at this juncture.”
2.25pm: US markets plunge after rate rise
US markets plunged into the red in the immediate aftermath of the news that the Federal Reserve had increased interest rates by 75 basis points today.
The latest increase brings the Fed’s main policy rate up to a range of 3%-3.25%, the highest since early 2008.
The hike was in line with expectations but policymakers also signalled more increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023.
Shortly after the news the Dow Jones Industrial Average was trading down 258 points at 30,448, the S&P 500 was 33 points lower at 3,823 and the Nasdaq Composite was down 105 points at 11,320.
All three major indices were higher ahead of the decision.
The US central bank accompanied the rate increase with its latest quarterly economic projections which predicted the economy would grind to a near standstill in 2022, with growth at 0.2%, rising to 1.2% in 2023.
The unemployment rate is projected to rise to 3.8% this year and 4.4% in 2023 while inflation is seen slowly returning to the Fed's 2% target in 2025.
Rate cuts are not foreseen until 2024.
2.05pm: Fed hikes rates by 75 basis points
The Federal Reserve on Wednesday decided to lift interest rates by 0.75 percentage point, the third consecutive increase of that magnitude as the central bank battles decades-high inflation.
The latest increase brings the Fed’s main policy rate up to a range of 3%-3.25%, the highest since early 2008.
12.05pm: US markets not rattled by Russia
The major US indices continued to rally, despite a looming interest rate hike or sabre rattling by the Russian president.
At midday, the Dow Jones Industrial Average was up by 0.5% to 30,857, the S&P 500 was up by 0.5% at 3,876, while the Nasdaq Composite was up by 0.4% at 11,464.
Chris Beauchamp, chief market analyst at online trading platform IG, said stocks have held up well midday, even with Russian president Vladimir Putin’s escalation of the war in Ukraine and an impending Fed rate hike.
“The prospect of another bumper Fed rate hike hasn’t done much to deter investors today, and stocks have clawed back some of yesterday’s losses. But the rebounds of late have been weak, and are usually quickly undone by fresh declines,” Beauchamp said in a statement.
He noted that while today’s 75 basis point move might be a done deal, there is a high chance that Federal Reserve chair Jerome Powell will deliver another rebuke to markets as he lays out the Fed’s plan to fight inflation even as the employment picture worsens.
Beauchamp also said that Putin’s sabre rattling has left markets unmoved, adding the qualifier: “for now.”
“Vladimir Putin’s decision to go for partial mobilisation while waving his nuclear arsenal around is a serious development, but for now markets are too focused on what they hope the Fed might say. But it puts another level of support in for energy prices, signalling that recession risks will only keep on rising,” said Beauchamp.
The major movers included General Mills (NYSE:GIS), up by 7.4% on news it reported better-than-expected quarterly profits and raised its full year sales forecast on strong demand for cereal, snacks and pet food. Also, Lucid Group rose by 4.1%, Illumina was up by 3.9%, and Iron Mountain (NYSE:IRM) was up by 3.6%.
On the downside, in a reversal from yesterday, casinos, cruise lines, and travel companies all slid, with Las Vegas Sands down by 4.7%, while Royal Caribbean fell by 4%, United Airlines dropped 3.6%, and Carnival was down by 3.6%.
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9.45am: Dow Jones up over 100 points
The major US indices opened higher as investors await today’s US Federal Reserve interest rate announcement.
At the opening, the Dow Jones Industrial Average was up over 100 points, by 0.5% to 30,861, the S&P 500 was up by 0.5% at 3,874, while the Nasdaq Composite was up by 0.3% at 11,453.
The US central bank looks likely to deliver its third consecutive 0.75 percentage point rate hike to subdue high inflation.
Oil, natural gas, gold and the US dollar were all up at the opening.
6.30am: Treading water
US stocks are expected to open modestly higher on Wednesday ahead of the latest Federal Reserve interest rate verdict, due at 2.00pm ET, which is expected to confirm widely held expectations of a 75 basis point (bp) rate hike.
Futures for the Dow Jones Industrial Average were up 0.3% in pre-market trading, while those for the S&P 500 gained 0.2%, and contracts for the Nasdaq-100 were 0.1% higher.
While investors widely expect a 75 basis point interest rate hike, there is still some residual fears of a bigger 100 basis point increase and that is likely to keep trading cautious.
“Activity on Fed funds futures still assesses less than 20% probability for a 100-basis point hike from the Fed today. And more importantly, the FOMC doesn’t have a modern history of making abrupt moves,” noted Ipek Ozkardeskaya, senior analyst at Swissquote bank.
Given the expectation that the Fed will deliver a 75bp hike today, confirmation of those expectations may well trigger a relief rally in both equities and bonds, she said.
Still, appetite for risk is poor ahead of the rate verdict, especially after Sweden’s central bank delivered a surprise 100 basis point rate increase yesterday, its most aggressive move in three decades, Ozkardeskaya noted.
US rate-setters have the tough task of having to dampen inflation which remains stubbornly around four-decade highs while also achieving a so-called soft landing for the wider economy. Investors fear that aggressive interest rate increases against the background of elevated inflation will push the world’s largest economy into a prolonged recession.
A 75-basis point hike today will mark the third such move in as many meetings and it remains to be seen if the rate increases are having their desired effect in taming inflation.
The outlook for share prices will also depend on the Federal Reserve's statement accompanying its rate decision and the news conference after the event. Any sign of continued hawkishness will weigh on equities. Conversely, any indication that price pressures are responding to the hefty recent rate hikes will bring out bargain hunters.
“We certainly have a couple of tense hours before the Fed decision falls,” said Ozkardeskaya.
Contact the author at jon.hopkins@proactiveinvestors.com