Wall Street stocks tumbled and the dollar rallied Wednesday (Sep 21) after the Federal Reserve announced another large interest rate increase and signalled it expects more monetary tightening ahead to fight inflation.
The US central bank announced its third consecutive interest rate increase of 0.75 percentage point, continuing the forceful action to tamp down inflation that has surged to the highest in 40 years.
US stocks had climbed ahead of the announcement, following positive sessions on leading European bourses and declines in Asia.
Equities gyrated after the Fed press release before taking a final decisive push lower during Fed Chair Jerome Powell’s news conference. The S&P 500 ended down 1.7 per cent.
“The higher-for-longer narrative kicked in,” Art Hogan, analyst of B Riley Wealth Management, said of the market’s reaction to an announcement that was more “hawkish” than expected.
Markets had been expecting another big interest rate increase, but were caught off guard by the Fed’s outlook as far as the need for additional hikes.
The latest Fed statement included interest rate projections for the end of 2023 and 2024 that are higher than the previous forecasts, signalling the US central bank now sees the need for a more prolonged monetary tightening cycle in light of inflation trends.
Powell emphasised the need for a “restrictive” monetary policy.
He acknowledged that bringing inflation down will require a period of slower growth and higher unemployment, noting that the job market is out of sync, with far more openings than workers.
“We have got to get inflation behind us,” Powell said. “I wish there were a painless way to do that. There isn’t.”
“The Fed is having to be cruel in order to restore price stability,” noted Russ Mould, investment director at AJ Bell.
“Higher rates will cause pain to households and businesses, with the jobs market being closely watched for signs of redundancies and hiring freezes.”
The Fed announcement also boosted the dollar, which hit a near 20-year peak against the euro.
“Once again, the Fed’s hawkish rate guidance kept the dollar biased higher as it distinguishes America’s central bank from its less aggressive counterparts abroad,” said Convera’s Joseph Manimbo.
The British pound also tumbled, even as the Bank of England prepares to announce its own large interest rate hike Thursday.
Although European and US equity indices were advancing ahead of the Fed’s decision, City Index analyst Fawad Razaqzada said he believes “the path of least resistance is to the downside and the selling pressure will likely resume amid a bearish macro-outlook”.
Elsewhere, oil prices finished lower on worries about weakening US demand, reversing a rally earlier on worries about the escalating Russia-Ukraine conflict after President Vladimir Putin called up Russian military reservists.