The shares fell in Wall Street and Treasury yields rose in afternoon trading Wednesday after the Federal Reserve raised its benchmark interest rate.
The Federal Reserve also said it expected to raise rates more than expected in the coming years. The S&P 500 lost 0.6%, after giving back an earlier rise of 0.9%. The Dow Jones index fell 0.4% and the Nasdaq fell 0.8 percent.
As expected, the central bank raised its short-term interest rate by 0.50 percentage points, which is its seventh rise this year. The latest rise is less than the previous four by 0.75 percentage points and comes a day after an encouraging report showed US inflation slowed in November for the fifth consecutive month.
Recent signs that inflation, while still painfully high, has eased had fueled optimism on Wall Street that the Fed might signal the possibility of rate cuts in the second half of next year. But during a news conference after the two-day meeting of the Fed’s policymakers, its chairman, Jerome Powellemphasized that the effects of the central bank’s efforts to slow the economy to reduce inflation have not yet been fully felt.
“Inflation data received so far for October and November shows a welcome reduction in the monthly pace of price increases, but substantially more evidence will be needed to give confidence where inflation is at a sustained downward pathPowell said.
Stocks had rallied before the Fed’s afternoon announcement, but they unraveled those early gains.
Bond yields, which had fallen before the Federal Reserve’s announcement, also rose. The yield on the 10-year Treasury note, which influences mortgage rates, rose to 3.52% from 3.50% late on Tuesday. The two-year yield, which more closely tracks the Federal Reserve’s expectations, rose to 4.27% from 4.22% on Tuesday.
The latest hike puts the Federal Reserve’s fed funds rate at between 4.25% and 4.5%, its highest level in 15 years. Fed policymakers expect the central bank rate to reach a range of 5% to 5.25% by the end of 2023. This suggests the Fed is willing to raise rates an additional 0.75 percentage point next year .
The Fed also signaled that it expects its rate to drop by the end of 2024 to 4.1%, and fall to 3.1% at the end of 2025.
“This is considerably higher than the financial market expectationswho expect the fed funds rate to drop to 3.9% by the end of 2023 and 2.6% by the end of 2024,” said Bill Adams, chief economist at Comerica Bank.
Higher rates raise the costs of many consumer and business loans and the risk of recession. Investors expected the Federal Reserve to soften its aggressive interest rate hikes to slow the economy and control inflation. Other central banks around the world, including the European Central Bank, are likely to also raise their own rates by half a percentage point this week.
On Tuesday, the US government reported that inflation slowed in November more than economists had expected. It’s another sign that inflation is easing and has given Wall Street hope that the Federal Reserve can take its foot off the brakes on the economy sooner than expected and possibly avert a recession.
Wall Street also closely watches economic reports on consumer spending. consumers and the job, which are still solid. This has made it more difficult for the Federal Reserve to control inflation, while helping to protect the economy from a possible recession.
The weekly report on unemployment benefits will be released in the United States on Thursday, along with retail sales data for November.
The markets asian they went up and the europeans they mostly went down.
(With information from AP)