Stocks fall as Fed leaves investors uncertain about rates

Stocks fall as Fed leaves investors uncertain about rates

Stocks wobbled on Wednesday but ended the day lower after Jerome H. Powell, chairman of the Federal Reserve, dashed investors’ hopes that the end of the central bank’s interest rate hikes could soon be over.

The S&P 500 fell to a 2.5 percent loss for the day, after fluctuating between gains and losses earlier as Mr. Powell spoke during an afternoon press conference on the Fed’s latest decision.

Stocks started the day lower as investors braced for the Fed to raise interest rates by an additional 0.75 percentage points. The central bank met that expectation, but attention quickly shifted to what the Fed thinks about further rate hikes to come.

The Fed’s initial statement, released alongside the rate decision, appeared to indicate a more cautious approach going forward, taking note of the large rate hikes that have already taken place and noting that it may take time for the economic impact of those rate hikes to diminish. felt.

The S&P 500 rallied shortly after the announcement, climbing into positive territory. But the recovery was quickly interrupted when Mr. Powell began his public comments by reiterating that the central bank “still has a ways to go” before it ends raising interest rates, and noted that with inflation remaining stubbornly elevated, interest rates may need to be higher than previously thought. expected.

“It is very premature” to talk about pausing rate hikes, he said. Investors responded quickly and the S&P 500 fell sharply. Trading in government bonds was similarly halted, with yields rising in the late afternoon after falling earlier in the day. The two-year Treasury yield, which is sensitive to changes in Fed policy, ended 0.06 percentage points higher at 4.59 percent.

“Woah! If you’re the kid in the back asking if we’re there yet and dad says we’ve got a ways to go, then you’re in for a ride,” said Rob Waldner, chief fixed income strategist at Invesco. “That hit me.”

Investors were hopeful heading into Wednesday’s meeting that a potential easing of the pace of rate hikes could be on the cards.

The S&P 500 rose about 8 percent in October, in part because of better-than-expected corporate earnings but also because some investors began betting that a turnaround in Fed messaging was coming.

While Mr. Powell made statements similar to those he has made in the past about the need to eventually slow rate hikes, the takeaway for investors on Wednesday was that the Fed’s focus remains firmly on curbing inflation.

Still, some investors have also questioned how clear the Fed itself has been about what needs to happen to convince it to stop raising interest rates. Mr Waldner said investors remained uncertain about what the central bank would do next – unclear how high rates would go, how long they would stay so high and what would need to happen for the Fed to change course. “Until we answer those questions, there will be instability,” he said.

Seth Carpenter, global chief economist at Morgan Stanley, speaking before Mr. Powell’s news conference, said he was also waiting for more concrete information on when the Fed might see fit to stop raising interest rates.

He noted that the Fed’s initial statement, released before Mr. Powell made his remarks, said the central bank was trying to get to a position where inflation would fall “over time.” Those words suggest that inflation may not return to the Fed’s 2 percent target, but may just stop accelerating, as it has in recent months.

“How clear are they in their thinking about the conditions needed to reduce the hikes and ultimately stop them?” Mr. Carpenter said.

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