Fed Signaling Rate Hikes Coming ‘Soon’ Triggers Pullback On Wall Street

Stocks were mostly higher for much of the trading session on Wednesday but came under pressure in reaction to the Federal Reserve’s highly anticipated monetary policy announcement. The major averages all moved to the downside, although the Nasdaq managed to creep back above the unchanged line.

After surging as much as 3.4 percent, the tech-heavy Nasdaq pulled back well off its best levels but still inched up 2.82 points or less than a tenth of a percent to 13,542.12. Meanwhile, the Dow fell 129.64 points or 0.4 percent to 34,168.09 and the S&P 500 dipped 6.52 points or 0.2 percent to 4,349.93.

The late-day pullback on Wall Street came after the Fed indicated that it plans to begin raising interest rates “soon,” citing elevated inflation and a strong labor market.

The Fed left interest rates unchanged at near-zero levels as widely expected but said the Federal Open Market Committee expects “it will soon be appropriate to raise the target range for the federal funds rate.”

The comments from the Fed were largely in line with expectations, as CME Group’s FedWatch Tool currently points to an 85.7 percent chance of a quarter-point rate hike at the next FOMC meeting in mid-March.

In an effort to combat the economic impact of the coronavirus pandemic, the Fed has left interest rates at zero to 0.25 percent since March of 2020.

The Fed previously pledged to leave interest rates unchanged until labor market conditions have reached levels consistent with the FOMC’s assessments of maximum employment.

Fed Chair Jerome Powell claimed during his post-meeting press conference that the central bank has “quite a bit of room” to raise interest rates before it would harm the economy.

The central bank also said it would further reduce the pace of its bond purchases to $30 billion per month beginning in February, with the Fed saying it expects to end its asset purchase program by early March.

In a separate statement, the Fed outlined plans to significantly reduce the size of its balance sheet, saying it expects to start the reductions after it begins raising interest rates.

The Fed announcement overshadowed a report released by the Commerce Department showing new home sales in the U.S. surged much more than expected to a nine-month high in the month of December.

Despite the pullback by the broader markets, software giant Microsoft (MSFT) held on to a notable gain after reporting better than expected fiscal second quarter results and providing upbeat guidance.

Sector News

Gold stocks moved sharply lower over the course of the session, dragging the NYSE Arca Gold Bugs Index down by 3.4 percent.

The sell-off by gold stocks came amid a steep drop by the price of the precious metal, with gold for February delivery tumbling $22.80 to $1,829.70 an ounce.

Interest rate-sensitive housing stocks also came under pressure in reaction to the Fed announcement, resulting in a 3 percent nosedive by the Philadelphia Housing Sector Index. The index ended the session at a three-month closing low.

Considerable weakness also emerged among telecom stocks, as reflected by the 2.4 percent slump by the NYSE Arca North American Telecom Index.

AT&T (T) led the telecom sector lower, plunging by 8.4 percent despite reporting better than expected fourth quarter results.

Commercial real estate, tobacco and airline stocks also moved to the downside on the day, while significant strength remained visible among semiconductor stocks.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Wednesday. Japan’s Nikkei 225 Index fell by 0.4 percent, while China’s Shanghai Composite Index climbed by 0.7 percent.

Meanwhile, the major European markets all moved sharply higher on the day. While the U.K.’s FTSE 100 Index jumped by 1.3 percent, the French CAC 40 Index and the German DAX Index surged up by 2.1 percent and 2.2 percent, respectively.

In the bond market, treasuries came under pressure in reaction to the Fed announcement. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, jumped 6.5 basis points to 1.848 percent.

Looking Ahead

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, although reports on weekly jobless claims, durable goods orders and fourth quarter GDP may also attract attention.

On the earnings front, Intel (INTC), Tesla (TSLA), and Whirlpool (WHR) are among the companies releasing their quarterly results and the close of today’s trading.

Comcast (CMCSA), McDonald’s (MCD), and Southwest Airlines (LUV) are also among the companies due to report their results before the start of trading on Thursday.

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