The S&P 500 closed higher on Wednesday after some choppy trading following the US Federal Reserve’s interest rate increase and its signal that more hikes would be needed to fight inflation, putting an end to the pandemic-era easy monetary policy.
The US Central bank announced a quarter-percentage-point increase in its benchmark overnight rate as was widely expected but the projection that its rate would hit between 1.75% and 2% by year’s end appeared to be more hawkish than some investors had expected.
While the US central bank flagged the massive uncertainty the economy faces from the war between Russia and Ukraine and the ongoing Covid-19 crisis, it said “ongoing increases” in the target federal funds rate “will be appropriate” to curb the highest inflation the country has witnessed in 40 years.
Market analysts reacted to the Fed announcement with caution.
“This looks like a Fed that is intending on causing recession in order to stamp out the inflation problem and that is as short sighted as calling inflation transitory a year ago,” Scott Ladner, chief investment officer, Horizon Investments, Charlotte, North Carolina.
Joseph LaVorgna, Americas chief economist at Natixis in New York was also concerned about the Fed’s impact on the economy.
“They’re going to try to be aggressive here in raising rates. I wish Jay Powell and company all the best of luck because they’re not going to get anywhere near as they think, unless they’re willing to throw a lot of people out of jobs, because that’s what’s going to happen. Because we’re going to have a recession. This is a recession forecast,” he said.
“I just don’t see the Fed being able to engineer this kind of tightening for what right now is inflationary demand destruction.”
Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis said that many investors may just be relieved the Fed is taking action.
“Hearing the Fed finally ‘say and act’ to tackle inflation is somewhat calming for the investment community, and for Main Street struggling with higher inflation.”
According to preliminary data, the S&P 500 gained 96.45 points, or 2.26%, to end at 4,358.90 points, while the Nasdaq Composite gained 491.50 points, or 3.80%, to 13,440.12. The Dow Jones Industrial Average rose 521.10 points, or 1.55%, to 34,065.44.
Historical data suggests tighter monetary policy has often been accompanied by solid gains in stocks. The S&P 500 has returned an average 7.7% in the first year the Fed raises rates, according to a Deutsche Bank study of 13 hiking cycles since 1955.
Ahead of the Fed statement stocks had been rallying as talk of compromise from both Moscow and Kyiv on a status for Ukraine outside of NATO lifted hope on Wednesday for a potential breakthrough after three weeks of war.
The global mood had also been lifted earlier by China’s promise to roll out more stimulus for the economy and keep markets stable.