Equity exchange-traded funds tumbled on the Federal Reserve’s 50 basis point hike as the central bank said it expects “ongoing increases” in interest rates, dampening investors’ hopes for an early end to the cycle of hikes.
Stocks reversed from their earlier gains after the Fed in a statement enumerated challenges to the global economy that may force future interest rate hikes: inflation, supply and demand imbalances and Russia’s war against Ukraine.
The S&P fell 0.6% after the announcement and a live broadcast of Federal Reserve Chairman Jerome Powell's comments, while the Nasdaq retreated 0.8%. The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) moved according to their underlying indices.
The central bank requires “substantially more evidence” to ensure inflation is on a downward trend, Powell said. “Reducing inflation is going to require below-trend growth,” he added.
The yield on the benchmark 10-year Treasury bill fell 2 basis points to 3.5%, while the policy-sensitive two-year note hit 4.2%. Bond prices fall as yields rise. The dollar index dropped by 0.4%.
“The treasury market doesn't seem to be buying what Powell is selling,” Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree said. "I don't think you've really ever had the two-year trade below the fed funds target, especially with more rate hikes to go.”
The central bank’s widely anticipated 0.50% interest rate increase follows four straight hikes of 0.75%. The fed funds rate now sits between 4.25% and 4.5%, the highest since 2007, and up from near zero at the beginning of this year.
Data from the Labor Department released Tuesday showed November’s consumer price index, a metric of how much consumers pay for goods and services, rose 7.1%, easing from the 7.7% reported the month prior. Despite inflation seeming to ease, Powell pointed to a hotter-than-expected labor market and elevated wage growth that would need to moderate for the central bank to bring down interest rates.
“The labor market continues to be out of balance,” he said, and noted that officials expect unemployment to rise to 4.6% by the end of next year.
Powell went on to state that the bank’s terminal rate, the level at which the Fed is expected to stop raising interest rates, would reach 5.1%. He added that officials aren’t yet confident the 5.1% peak estimate won’t change in the months to come.
Fed officials indicated they expect interest rates to rise to 5.1% by the end of next year. They see rates at 4.1% in 2024, up from the 3.9% predicted previously.
Meanwhile, commodity markets steadied after the decision. Brent crude, the global oil benchmark, rose 0.2% to $82.84. The United States Brent Oil Fund LP (BNO) and the iPath Pure Beta Crude Oil ETN (OIL), which both track crude oil futures contracts, rose 2.8% and 2.2%, respectively.
Contact Shubham Saharan at [email protected]