Markets

US stocks tumble after Fed raises rates again

US stocks and short-term government debt tumbled after the Federal Reserve announced a third consecutive 0.75 percentage point increase in interest rates and signalled borrowing costs would remain high for an extended period.

The US central bank on Wednesday lifted its main interest rate to a range of 3 per cent to 3.25 per cent. The increase was in line with expectations, but the closely watched “dot plot” of individual officials’ predictions pointed to further large increases and no cuts before the end of next year.

Wall Street’s benchmark S&P 500 index suffered a second day of losses, declining 1.7 per cent and taking its losses for the year to 20.5 per cent. The drawdown pushed hundreds of stocks trading in the US to new 52-week lows, with more than 90 per cent on the companies in the S&P 500 sliding in value.

The Nasdaq Composite, which is dominated by tech companies that are considered particularly sensitive to interest rates, tumbled 1.8 per cent.

Treasury markets, which had been muted before the decision, swung as investors increased their bets on the scale of future rate rises. The yield on the policy-sensitive two-year note rose, hovering just under the 15-year high of 4.1 per cent hit immediately after the Fed statement. Yields rise when prices fall.

Futures markets showed investors expected the fed funds rate to peak at about 4.6 per cent next May and be 4.2 per cent at the end of 2023, compared with forecasts of 4.5 per cent and 4.1 per cent, respectively, immediately before the decision.

The shift in overnight funding markets nonetheless showed the market continued to discount policymakers’ projections, given officials at the Fed on Wednesday said they believed rates would end next year at 4.6 per cent.

James McCann, deputy chief economist at Abrdn, the fund manager, said Powell was “signalling that the Fed is in ‘whatever it takes’ mode to get the job done,” referencing the famous speech made by European Central Bank chief Mario Draghi at the height of the eurozone sovereign debt crisis.

“A key part of the message here is that policy is not necessarily going to pivot as soon as the economy starts to slow. They’re prepared to leave policy at restrictive levels even as the labour market weakens … that’s an important message for markets, which continue to look for this potential turning point.”

Powell emphasised in his press conference following the interest rate announcement that “the historical record cautions strongly against prematurely loosening policy”.

The US dollar index, which measures the currency against a basket of peers, hit a 20-year high following the Fed statement, ending the day up 0.9 per cent.

Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets, said the dollar’s strength “is incrementally becoming more problematic for the world economy” as it puts pressure on emerging market issuers of foreign currency debt and commodity exporters.

Its ascent on Wednesday also followed an address by Russian president Vladimir Putin, in which he said the country’s armed forces would call up reservists immediately to support the invasion of Ukraine. The US dollar is widely perceived as a haven currency during times of geopolitical tension and economic stress.

Victoria Scholar, head of investment at the fund supermarket Interactive Investor, said a combination of haven demand and the Fed’s rate rise were driving demand for the dollar against most major currencies.

“The dollar is rallying more aggressively against the euro than the pound given that the Bank of England on Thursday is expected to follow the Fed with a similarly hawkish rate increase. The interest rate differential allure of the dollar post the Fed is only likely to last one day against the pound if we see a similar [0.75 percentage point] hike from the Bank of England.”

Earlier in the day, Hong Kong’s Hang Seng index slid 1.8 per cent and China’s mainland CSI 300 fell 0.7 per cent. Japan’s Topix lost 1.4 per cent.

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