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Wall Street slumps as Federal Reserve continues to raise rates


MongiIG

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While the Federal Reserve delivered its fourth straight 75 bps increase on Wednesday, the “slower but higher” prospect saw the S&P 500 suffer its worst loss on a Fed decision day since January 2021.

1667438361753.jpgSource: Bloomberg
 
Hebe Chen | Market Analyst, Melbourne | Publication date: Thursday 03 November 2022 

The highest interest rate in 14 years

The US central bank raised the lending rate by 0.75 percentage points making it the fourth straight increase of that size and the sixth hike this year

As expected, Fed Chair Jerome Powell signalled the journey to curb inflation could be entering the final phase as the pace of future rate increases would consider the “cumulative tightening of monetary policy”.

The Fed’s decision from November’s FOMC meeting lifted rates to a range of 3.75% to 4%, its highest level since 2008.

Fed signals slowing down

According to the board’s statement, the Federal Reserve anticipates that ongoing increases within the target range will return inflation to two percent. Jerome Powell asserted that it was “very premature” to consider pausing rate increases as rates could peak at higher levels than previously thought.

For the first time, the Fed acknowledged the economic costs and "lags" with the policy. That being said, the Fed is unwilling to create a narrative that would suggest they are ‘pivoting’ from reducing inflation pressures.

In other words, while the Fed is considering slowing down the fastest pace of tightening in decades, investors are not in the position to expect the rate to peak and loosen policy any time soon.

Therefore, the economic strain has become the elephant in the room and will come to the forefront in the near future.

How did the market respond?

  • Stocks

While the US stocks started in the positive when Powell announced the new rate decision, things quickly changed. The equity market plunged immediately after he stated the Fed still has “some ways to go”. Powell added that it was premature to think about a pause as rates could peak at higher levels than previously thought.

The “slower but higher” prospect saw the S&P 500 suffer its worst loss on a Fed decision day since January 2021.

S&P 500 hourly chart

1667438361715.JPGSource: IG

US dollar

The US dollar surged by more than 0.5% immediately after FOMC’s press conference. The green back is now returning to the level of 111 while strictly following the ascending trajectory.

Meanwhile, the US’s 10-year bond yield edged higher to 4.08% while the two-year yield reached 4.62%.

US dollar hourly chart

1667438361726.JPGSource: IG

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