Market Reaction to the Fed Decision
Stocks fell as the Fed raised rates by seventy-five basis points and forecast more rate hikes ahead in its fight to tame inflation. After a volatile session, stock indexes finished sharply lower even though at its highs, the Dow was up more than 314 points. The S&P 500 fell 1.71% to 3,789.93, and the Nasdaq dropped 1.79% to 11,220.19, and the DJIA slid 522.45 points, or 1.7%, to close at 30,183.78. The small-cap Russell 2000 fell 1.5%, slightly outperforming. Volume was higher on the NYSE and on the Nasdaq. All major S&P 500 sectors finished the session in negative territory, leading to the downside by consumer discretionary, communication services, and materials (down -2.37%, -2.29%, and -2.11% respectively). U.S. crude oil prices continue to fall in response to cooling economic conditions and were down -1.2% to $82.94 a barrel. The 10-year Treasury yield fell six basis points to 3.51% after briefly hitting 3.62% following the Fed rate hike. The two-year Treasury yield rose above 4%, closing around 4.04% but well-off session highs. The fact that bond yields did not close at the session highs was the only bright spot for equity bulls. As we mentioned at the top, the Fed raised rates by the widely expected seventy-five basis points and said it expects its so-called terminal rate to reach 4.6% to fight persistently high U.S. inflation. That is the rate at which the central bank will end its tightening regime, and it was higher than what the market wanted to hear. The central bank also indicated that it plans to stay aggressive, hiking rates to 4.4% by next year, but noted that housing had cooled and that at some point scaling back hikes will be necessary. Traders were closely watching policymakers’ projections of monetary tightening in the so-called “dot plot” of interest rates for the rest of 2022 and the following years, which gave them a glimpse to how high they will go in the future. According to the statement, the central bankers now see a median “terminal” rate of 4.6% that we mentioned earlier. They see that in 2023 and said they do not see any rate cuts until 2024. In the end, the S&P ended today’s session down more than 10% in the past month and 21% off its 52-week high. The bear market continues. Even before the rate decision, stocks were pricing in an aggressive tightening campaign by the Fed that could tip the economy into a recession. Now the Fed has just inched us 75 bps closer to a deep recession. As we look past the policy drama, the market is now aware of the Fed and their plans going forward. This backdrop of extreme pessimism in the short term may turn out to be an opportunity for patient intermediate and longer-term investors.
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