Stocks slide, yields jump as Fed projects earlier rate hikes

Stocks slide, yields jump as Fed projects earlier rate hikes

WASHINGTON: Markets were jostled Wednesday after U.S. Federal Reserve officials projected interest rate hikes sooner than expected, with stocks sliding and the dollar jumping on the news.

All three major U.S. indices fell following the afternoon announcement, as investors digested the possibility that interest rates could begin climbing sooner as Fed officials cited an improved economic outlook.

At the conclusion of its two-day policy meeting, the Fed disclosed that 11 out of 18 officials were projecting at least two quarter-point interest rate increases in 2023, as Fed Chairman Jerome Powell insisted at a press conference that the U.S. economy is well positioned coming out of the pandemic. The Fed said monetary support will remain until "substantial further progress" is seen on employment and inflation.

"The central case growth and inflation expectations for the next couple of years have not changed by much since March, but there is an explicit recognition that the vaccination program has reduced the risks to the economy from the health crisis," said Brian Coulton, chief economist at Fitch Ratings.

Investors had been fixated on the new Fed statement all week, as it was the first policy update from the central bank since fresh economic data showed job growth slowing and inflation on the rise. New projections from Fed officials showed an uptick in projection inflation in the near term, but the Fed did not indicate any significant rethinking of its approach, said analysts.

"Clearly expectations for the Fed to flinch were grossly overblown—a unanimous vote clearly shows they’re all on the same page with the current state of the economy, and importantly they’ve essentially doubled down on their view that inflation is transitory, albeit at a higher rate than last time they met," said Mike Loewengart, managing director of investment strategy for E*Trade Financial. "But what happens next year becomes more of a question mark."

Markets dipped immediately following the statement, but recovered from session lows as investors digested the news.

The MSCI world equity index, which tracks shares in 45 nations, fell 2.39 points or 0.33per cent. The Dow Jones Industrial Average fell 265.66 points, or 0.77per cent, the S&P 500 lost 22.89 points, or 0.54per cent, and the Nasdaq Composite dropped 33.17 points, or 0.24per cent.

TREASURIES, DOLLAR SURGE

The prospect of higher rates was felt in Treasury bonds and the dollar, which both jumped following the Fed statement.

The benchmark 10-year yield rose to its highest level since June 4 at 1.594per cent. It was last up 7.5 basis points at 1.5737per cent.

The five-year yield had its biggest one-day move since February, climbing to its highest level since April 6 at 0.913per cent.

The dollar index =USD, which tracks the greenback against six major currencies, was up 0.63per cent at 91.103, its highest since May 6.

Safe-haven gold prices took a hit on the Fed news, with spot gold falling 1.6per cent to US$1,829.16 per ounce. U.S. gold futures settled up 0.3per cent at US$1,861.40.

Oil prices posted gains for the fifth straight day on an anticipated surge in demand alongside falling crude inventories. Brent crude gained 40 cents, or 0.5per cent, to hit US$74.39 a barrel, reaching its highest since April 2019, and running its gains to five straight days. U.S. crude rose 3 cents to US$72.15, after reaching US$72.99, highest since October 2018.

(Reporting by Pete Schroeder; Editing by Cynthia Osterman and Lisa Shumaker)

Source: Reuters

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