US stocks slump as investors absorb hawkish Fed rate message

WALL Street’s main indexes see-sawed before slumping in the final 30 minutes of trading to end Wednesday lower as investors digested another super-sized US Federal Reserve hike and its commitment to keep up increases into 2023 to fight inflation.

All three benchmarks finished more than 1.7% down with the Dow posting its lowest close since June 17 while the Nasdaq and S&P 500 are at their lowest point since July 1 and June 30 respectively.

The Dow Jones Industrial Average fell 522.45 points or 1.7% to 30,183.78, the S&P 500 lost 66 points or 1.71% to 3,789.93 and the Nasdaq Composite dropped 204.86 points or 1.79% to 11,220.19.

At the end of its two-day meeting, the Fed lifted its policy rate by 75 basis points (bps) for the third time to a 3.00-3.25% range. Most market participants had expected such an increase with only a 21% chance of a 100 bps rate hike seen prior to the announcement.

However, policymakers also signalled more large increases to come in as new projections show that the Fed’s policy rate is rising to 4.40% by end-2022 before topping out at 4.60% in 2023. This is up from projections in June of 3.4% and 3.8% respectively.

Rate cuts are not foreseen until 2024, the central bank added, dashing any outstanding investor hopes that the Fed foresaw getting inflation under control in the near term. The Fed’s preferred measure of inflation is now seen slowly returning to its 2% target in 2025.

In his press conference, Fed Chair Jerome Powell said US central bank officials are “strongly resolved” to bring down inflation from the highest levels in four decades and “will keep at it until the job is done”, a process he repeated would not come without pain.

“Chairman Powell delivered a sobering message. He stated that no one knows if there will be a recession or how severe, and that achieving a soft landing was always difficult,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Higher rates and the battle against inflation was also feeding through into the US economy, with the Fed’s projections showing year-end growth of just 0.2% this year, rising to 1.2% in 2023.

“Markets were already braced for some hawkishness based on inflation reports and recent governor comments,” said BMO’s Ma.

“But it’s always interesting to see how the market reacts to the messaging. Hawkishness was to be expected, but while some in the market take comfort from that, others take the position to sell.”

All 11 S&P sectors finished lower, led by declines of more than 2.3% by Consumer Discretionary and Communication Services.

Volume on US exchanges was 11.03 billion shares compared with the 10.79 billion average for the full session over the last 20 trading days.

The S&P 500 posted two new 52-week highs and 70 new lows; the Nasdaq Composite recorded 44 new highs and 446 new lows. – Sept 22, 2022

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