Federal Reserve Hikes Interest Rates, Market Sways
Words have meaning, and hold power.
The Federal Open Market Committee (FOMC) had plenty to say in a few short words Wednesday when it exercised power to set the stock market on a new path.
Hopes of a hike in benchmark interest rates coming in as expected and the FOMC weakening its hawkish stance were realized.
Market falters as Federal Reserve hikes interest rates
Benchmark interest rates will rise another 75 basis points, or .75%, and push the federal funds rate to a range of 3.75% to 4.0%.
This was the sixth interest rate hike this year from the FOMC, and the fourth .75% rate hike in a row.
The stock market quickly shifted from slightly negative to green across the board on release of the FOMC statement.
Central to the statement for traders was, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
In addition, “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities,” which is part of its overall plan to lower core inflation to a 2% target.
Core inflation has risen along with overall inflation remaining above 8% – a level not seen for 40 years.
September U.S. Producer Price Index (PPI) numbers – at 6.6% annually – show core PPI inflation at more than triple the Fed target level of 2%. U.S. Consumer Price Index (CPI) core inflation climbed to 6.6% year-over-year.
After its .75% (75 basis points) rate hike today, the Fed Reserve (Fed) anticipates raising interest rates further through 2023, to a level as high as 4.6%. The latest hike raised the target range for the federal funds rate for the sixth time this year, bringing the target range to 3.75% to 4.0%.
Stock market, traders still hoping for lower interest rates
The next round of hope for market participants is that the Fed only raises rates by .5% in December, and then continues with lower increases into 2023 before stopping the hawkish increases altogether.
Traders are encouraged not to rely on hope when planning for future Fed actions. The FOMC still holds the pen to change the plot line in this story.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the Wednesday FOMC stated.
And, like all things in trading, a variety of influences could cause the FOMC to rewrite its plans.
“The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” the statement read.
Positive market reaction falters across indexes
For traders, market reaction to the FOMC stance and following statements from Fedofficials will continue to be significant factors in trading plans.
Across the board, positive reaction to the FOMC statement didn’t hold for long in the stock market Wednesday afternoon.
Within an hour of the FOMC statement, all three major indexes gave up any “reactive” gains and moved lower. The S&P 500 and Nasdaq were down by 1% or more and the Dow was back down by .50%. All three indexes gapped down into the final hour of trading.
“I wouldn’t be surprised to see a decent sell-off, but I’m not looking for a rollover and die and take out the lows,” said John Carter, Founder of Simpler Trading.
Simpler’s traders are working through the Fed news and how the market reacts, adjusting trading plans as needed.