U.S. stocks ended little changed on Wednesday, despite volatile intraday trading as investors digested the impact of the Federal Reserve’s interest rate decision, at which the Fed left rates unchanged while signaling that further tightening measures far deeper than market participants expected were still possible.
“It was a bit of a ‘split personality’ meeting, with the Fed enforcing the first pause in rate hikes in this tightening cycle, while at the same time retaining the largest rate hike this year,” SEI Chief Investment Officer Jim Smigiel said in emailed comments. There is a strong possibility of two rate hikes.”
As expected, the Fed left its target range for the federal funds rate unchanged at 5% to 5.25% on Wednesday, the first pause since a series of aggressive rate hikes began in March 2022 that took rates from near zero . But the Fed’s so-called dot plot hints at 50 basis points of rate hikes ahead, not 25 basis points.
That prompted a slide in U.S. stocks and sparked a sharp rise in U.S. Treasury yields, especially the policy-sensitive 2-year note. Treasury yields move inversely with prices.
But those losses reversed after Fed Chairman Jerome Powell took the podium. Analysts focused on Powell’s failure to commit to raising rates in July. He told reporters that nothing had been decided yet and that next month’s meeting could be a “camera decision-making meeting”.
Powell also noted that central bankers see inflation continuing to slow.
Overall, the performance reflects what EY chief economist Gregory Daco described as the Fed’s “cognitive dissonance.”
The Federal Open Market Committee (FOMC) unanimously decided to keep the policy rate unchanged in June, he wrote, although policymakers believed it was necessary to raise the federal funds rate by another 50 basis points due to their extreme reliance on data.
Daco also said, “However, Fed Chairman Powell did not mention the pause in the tightening cycle, but emphasized that the Fed has only slowed down the pace of tightening. He said that the July meeting will make a decision based on the situation at that time.”
But Daco thinks a rate hike in July is possible. He said he was skeptical about Powell’s slip of the tongue. Powell called Wednesday’s policy decision “skipping” a rate hike, before saying “I shouldn’t call it skipping.”
Daco said the comments, along with calling the July meeting a “camera decision-making meeting,” suggested that a rate hike in July was all but certain, and likely explained how Powell was “in the midst of differences among policymakers.” , trying to secure a unanimous vote in favor of a pause in rate hikes.”
Meanwhile, traders of U.S. federal funds futures are betting on about a 60 percent chance of a 25 basis point hike next month and a 12 percent chance of a 50 basis point hike, according to the CME FedWatch tool.
The S&P 500 closed Wednesday not far from where it was before the Fed statement, ending the day up 0.1% at 4,372.59, its highest close since April 21, 2022, its eighth straight session go higher.
The Dow fell 232.79 points, or 0.7%, dragged down by a 6.4% drop in UnitedHealth Group (UNH), while the Nasdaq Composite climbed 0.4%.
“Given this ultra-tightening rhetoric, equities continue to show surprising resilience,” Smiegel wrote. “It feels like investors are taking a more optimistic view of the stock market right now, and that this rally will fade as we move into the second half of the year.”
(This article is translated from MarketWatch. MarketWatch is operated by Dow Jones, the parent company of The Wall Street Journal, but MarketWatch is independent of Dow Jones Newswires and The Wall Street Journal.)