Federal Reserve hints at upcoming price hikes
Wall Street experienced a mixed outcome as the Federal Reserve hinted at the possibility of raising interest rates twice more within the year, despite keeping them unchanged on Wednesday. The S&P 500 closed the day with a 0.1% increase, fluctuating between gains and losses after the Fed's announcement. However, the Dow Jones Industrial Average declined by 232 points (0.7%), while the Nasdaq composite saw a 0.4% rise.
In its latest policy meeting, the Fed decided to maintain the current rates to allow for a better understanding of how the series of rate hikes over the past 15 months are impacting the economy. The Fed aims to strike a delicate balance of moderately slowing down the economy through rate increases to combat high inflation without jeopardizing the job market and risking a recession.
Maintaining the rates will provide the economy and financial markets with additional time to adjust to previous rate hikes. Federal Reserve Chair Jerome Powell stated that by allowing more time, they can avoid going beyond the necessary level. This approach would offer some breathing room for both the economy and financial markets.
However, the majority of Fed policymakers indicated their expectation of at least a 0.50 percentage point increase in the main interest rate by year-end. Currently, the federal funds rate stands between 5% and 5.25%, its highest level since 2007.
Despite a slowdown in inflation since the peak in the previous summer, Powell expressed concerns about insufficient improvements in underlying trends. He mentioned that a closely monitored measure remained significantly above the target, and the Fed wishes to see a decisive downward trend.
In response to the anticipated rate increases, bond market yields rose after the Fed's announcement. The 10-year yield briefly reached 3.83% before settling at 3.79%, impacting rates for mortgages and other significant loans.
Initially, stock indexes declined in reaction to concerns about higher rates, which tend to slow down the economy and decrease the value of stocks, bonds, and other investments. However, losses were trimmed, and bond yields retreated as Powell emphasized during a press conference that no decisions regarding upcoming rate hikes had been finalized. He also highlighted that the Fed's next meeting in July held potential changes.
Overall, the S&P 500 closed with a 3.58-point increase at 4,372.59. The Dow Jones dropped by 232.70 points to 33,979.33, while the Nasdaq increased by 53.16 points to 13,626.48.
This marked the first time in over a year that the Fed did not raise rates at a meeting, as calls for a pause intensified due to the adverse effects of high rates in several sectors of the economy.
While interest rate hikes typically take a considerable amount of time to have an impact, they can lead to unexpected consequences. Already, they have contributed to notable failures in the U.S. banking system, a prolonged contraction in the manufacturing industry, and concerns about a potential recession.