The S&P 500 closed down 1.7% after gaining as much as 1.5% earlier in the day as the Fed raised rates by 75 basis points and officials’ projections for year-end hikes rose another percentage point at least. The 2 year Treasury yield was just over 4%.
“It will probably take some time for the full inflationary effects of changing financial conditions to play out. We are very cautious about that,” said Fed Chairman Jerome Powell, noting that at some point it will be appropriate to slow the pace of rate hikes so that officials can assess the impact.
Read more: Fed Delivers Third Straight Big Hike, More Increases Ahead
The price moves sharply after the decision and while Powell was speaking raised eyes across Wall Street. However, some cautioned that the earlier positive market reaction did not make much sense.
Powell is “delivering the hawkish message and any immediate rally here needs to be viewed with great skepticism,” said Steve Chiavarone, senior portfolio manager at Hermes Federal:
Here’s what other market watchers had to say:
Eric Winograd, senior US economist at AllianceBernstein:
“Most of what we’ve seen from the Fed in the statement and projections is consistent with expectations. However, I think the economic forecasts are still too optimistic. Unemployment is still only rising to 4.4%, which is only slightly above the long-term neutral rate. I doubt that that small increase in unemployment will be enough to bring inflation down again. That said, they are clearly comfortable with a very slow return to target inflation — their forecasts do not show inflation returning to 2% until 2025.”
Sameer Samana, Wells Fargo Investment Institute senior global market strategist:
“The market seems to be struggling with the possibility of higher rates at the end of the year on the one hand, and the possibility that most of the rate hike cycle may be done earlier on the other hand. While the rates are not positive, there is some benefit in being able to move on from Fed policy as a driver back to macros/fundamentals/valuations, etc. valuation repricing, particularly consumer discretionary growth stocks and leading staples/defensives, will be the hardest hit after the announcement. I think it’s fair to say that this is a bit of a hawkish surprise, but the markets were expecting to err on the hawkish side.”
Peter Tchir, head of macro strategy at Academy Securities:
“The dots and other details were carefully planned to convey a message — more attention this year and increases next year more likely than not. And look, inflation comes down, there’s no real recession, the unemployment rate doesn’t even go up.”
Cameron Dawson, chief investment officer of Newedge Wealth:
“The longer the Fed keeps rates in restrictive territory, the more likely we will see major disruptions to capital markets, beyond what we are seeing today with falling valuations and weak IPO activity. The Fed is making capital scarce and expensive, which means companies needing to find financing in public and private markets will face increased challenges.”
Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth Management:
“Faced with persistently high inflation, the Fed is acting aggressively to slow the economy and thus prices are rising. We continue to expect further market volatility as the Fed performs a delicate balancing act between working to moderate economic growth and not going too far.”
Jane Edmondson, CEO of EQM Capital:
“Here’s what worries me and others: 1) Fed QT started in September. 2) These rate hikes have a delayed effect, which the economy has not yet fully recovered. 3) Worry that the Fed is in overdrive (that’s what Gundlach calls it) and will get us into a recession. And I question whether these rate hikes can even control inflation. Housing is a perfect example. Housing was one of the biggest increases in CPI in August – of course if it was driven by higher interest rates. I have little confidence that the Fed’s actions will be a cure for inflation. 4-5% inflation may be the new normal. And that would be fine in the short term.”
James Abate, chief investment officer at Center Asset Management:
The Fed “created this situation by keeping rates too low for too long, so now they’re forced to take a more aggressive approach. They are like an arsonist who works as a volunteer firefighter, who can be seen as a champion for a fire they put out. Big tech is a group that will continue to bleed into the future. At best it will be in line with market performance. At worst, it underperforms.”
(Updates chart to add Dawson’s comment. Corrected an earlier version to say the Fed raised rates)
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