The Fed raised rates the expected 75 basis points, and also now sees the peak rate rising to 4.6% at some point next year. It also sees slower economic growth and rising unemployment.
The Fed raised its target rate another 75 basis points, as most investors had expected
Fed now projects rates to peak at 4.6% next year, above the previous 3.8%
Fed sees slower economic growth, rising unemployment
Shawn Cruz, Head Trading Strategist, TD Ameritrade
(Wednesday Market Close) After a less-than-surprising decision by the Federal Open Market Committee to raise the overnight rate another 75 basis points, stocks swooned and closed sharply lower after a wild bout of back-and-forth trading.
The rate hike itself had less to do with the selling on Wall Street. It was more about the Fed’s slowing economic projections for the coming years and Fed Chairman Jerome Powell’s press conference remarks, where he made a firm commitment to keep pushing rates up until the central bank’s inflation goals are achieved. “We always understood a soft landing would be very challenging,” Mr. Powell told reporters.
The major indexes slid immediately after the announcement, recovered a bit, and then slid in the last half hour. The Nasdaq ($COMP) fell 1.79% to 11,220; the S&P 500® index (SPX) fell 1.71% to 3,789, and Dow Jones Industrial Average ($DJI) finished down 1.7% to 30,183.
The market appears to be repricing a much more hawkish Fed that seems committed to getting inflation down at all costs. The drop below 3,800 in the SPX was technically meaningful, as that had been seen as a major support point.
For the Fed, this was the third 75-basis-point hike in a row, reinforcing the how hard it’s been for the central bank to get stubborn inflation under control.
The Fed’s move brought the rate up to a range of between 3.0% and 3.25%. That’s the highest in 15 years, and compares to zero a year ago. Until 2022, the Fed hadn’t raised rates by 75 basis points since 1994. Now it’s done it three meetings in a row.
Perhaps more troubling for the market is the Fed’s projected “terminal rate,” or the highest rate it now predicts for the current rate hike cycle. That number rose to 4.6% in 2023 on the Fed’s new dot-plot, up from the Fed’s June projection of 3.8% and higher than some analysts had expected. That projection, which means the Fed now sees rates rising higher and staying elevated longer, appeared to put a damper on growth stocks immediately after the FOMC decision.
Higher rates mean higher borrowing costs for businesses and households and can weigh on company profit margins. Several major companies recently have made announcements that seem designed to manage investor expectations for the coming quarter, a possible sign that rising rates could be hurting earnings potential.
The Fed does see rates at a median of 3.9% in 2024, below the 4.6% median for 2023, and at 2.9% in 2025. It lowered its projection for 2023 U.S. gross domestic product (GDP) growth to 1.2% from June’s 1.7% projection, and 2024 GDP was lowered to 1.7% from the previous 1.9%. For this year, the Fed now expects anemic 0.2% GDP growth, well below the 1.7% it had previously projected. This may also be hurting stocks.
Also, the Fed raised its projection for unemployment in 2023 and 2024, now seeing it topping out at 4.4% in both years, up from the prior 3.9% and 4.1%. The Fed doesn’t see inflation coming down to near its 2% target until 2024 and 2025.
The Fed hasn’t stopped at raising rates alone. It also confirmed it still plans to increase its quantitative tightening to $95 billion in September as it tries to clean up its balance sheet.
In the follow-up press conference, Fed Chairman Jerome Powell declined to answer questions about the Fed’s next move but noted that the median FOMC projection is for 125 additional basis points of hikes before the end of the year.
Powell added that long-term inflation expectations “remain well anchored.” That’s an important takeaway for the central bank which fears that inflation expectations could become “entrenched” and create a much harder situation to recover from. He says he “anticipates ongoing increases” will be appropriate in the Fed’s target rate.
Before the Fed decision, a bit more of a “risk-on” sentiment crept into the market following Tuesday’s sharp losses. Stocks got a slight bump, with all the major indices higher by mid-morning, and volatility eased. The Cboe Market Volatility (VIX) index dropped below 27. It popped back above that level following the decision and stocks fell back. However, the barometer to watch for the S&P 500 (SPX) is 3,800, and we’ll see whether that can hold.
Both the 10-year Treasury yield (TNX) and the rate-sensitive 2-year Treasury yield hit new highs immediately after the Fed’s decision, with the 2-year yield jumping above 4.1% Wednesday for the first time since 2007. Both finished slightly off their midday highs. By late Wednesday, the 2-year yield was about 47 basis points above the 10-year yield and is up more than 75 basis points over the last month alone, a pretty astonishing run. The 2-year’s yield premium to the 10-year yield has risen nearly 20 points during the same period, perhaps a signal of declining investor confidence in the economy.
CHART OF THE DAY: (T10Y2Y:FRED—blue) aka the 2s10s ratio, is inverted when the ratio is below zero. An inverted ratio often precedes a recession (light columns). The current inversion has steepened significantly over the past month. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
About the only place in America where falling home sales might get a cheer could be the Eccles Building in Washington, D.C. During the final minutes of the two-day FOMC meeting, Federal Reserve members got what would have otherwise seemed like a positive bit of inflation news as the National Association of Realtors (NAR) reported that sales of previously owned homes fell 0.4% from July to a seasonally adjusted annualized rate of 4.80 million units in August—the slowest sales pace since June 2020.
But not so fast. As mortgage rates are now safely over 6%, the U.S. central bank still faces a complicated task taming inflation in a nation facing a persistent housing shortage. Which is why this nugget caught our attention—the Mortgage Bankers Association also reported today that mortgage applications rose 3.8% for the week ended September 16th, the biggest jump in three months.
Inside that number, refinancing applications jumped 10.4% and applications to purchase a home went up 1%.
But housing activity could be slowing. As of Tuesday, Fortune’s interactive housing map—which looks at how pricing is moving nationwide—was describing the current environment as “pressurized” due to record pandemic-era housing appreciation, rising mortgage rates and “debt-to-income ratios for new buyers on par with levels hit during the peak of the housing bubble.”
Not an easy job for the Fed.
Sep 21: Existing home sales, FOMC interest rate decision and Federal Reserve Chairman Powell’s press conference followed by earnings from General Mills (GIS), Lennar (LEN), H.B. Fuller (FUL), and KB Home (KBH)
Sep 22: Earnings from Costco (COST), Accenture (ACN), FedEx (FDX), FactSet Research (FDS), and Darden Restaurants (DRI)
Sep 27: Durable goods orders, CB consumer confidence, New home sales and earnings from Cintas (CTAS), Jabil Circuit (JBL), BlackBerry (BB), Cal-Maine Foods (CALM), and Cracker Barrel (CBRL)
Sep 28: Pending home sales and earnings from Paychex (PAYX)
Sep 29: Gross Domestic Product (GDP) and earnings from Nike (NKE), Micron (MU), CarMax (KMX), Carnival (CCL), and Bed Bath & Beyond (BBBY)
Sep 30: Personal Spending, Chicago PMI, Michigan Consumer Sentiment
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