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Post-Fed Volatility Ends With Sharply Lower Close On Wall Street

wallstreet oct03 21sep22 lt

Stocks typically see wild swings following the Federal Reserve's monetary policy announcements but saw particularly significant volatility on the heels of the central bank's latest decision on Wednesday.

The major averages swung back and forth across the unchanged line before finishing the day just off their lows of the session.

The Dow slumped 522.45 points or 1.7 percent to 30,183.78, the Nasdaq plunged 204.86 points or 1.8 percent to 11,220.19 and the S&P 500 tumbled 66.00 points or 1.7 percent to 3,789.93.

With the sharply lower close, the Dow fell to a three-month closing low, while the Nasdaq and the S&P 500 dropped to their lowest closing levels in well over two months.

The late-day volatility came after the Fed raised interest rates by another three-quarters of a percentage point and signaled further aggressive rate hikes for the remainder of the year.

Citing its dual goals of maximum employment and inflation at a rate of 2 percent over the longer run, the Fed decided to raise its target range for the federal funds rate by 75 basis points to 3 to 3.25 percent.

The move marks the third straight 75 basis point rate hike by the Fed and lifts rates to their highest level since early 2008.

With inflation remaining elevated, the Fed also said it anticipates that ongoing interest rate increases will be appropriate.

Economic projections provided along with the announcement suggest Fed officials expect to raise rates to 4.4 percent by the end of the year, well above the 3.4 percent forecast in June.

Fed officials expect to increase rates to 4.6 percent by the end of 2023 before eventually scaling back rates in 2024 and 2025.

"The policy statement was almost identical to July's, so the real interest was in the accompanying economic projections," said Michael Pearce, Senior U.S. Economist at Capital Economics.

"The Fed now anticipates rates reaching 4.4% by the end of this year, implying another 75bp move in November followed by a 50bp move in December," he added. "The median projection for end-2023 is up to 4.6%, implying one more 25bp rate hike early next year."

In his post-meeting press conference, Fed Chair Jerome Powell reiterated the central bank's strong resolve to bring inflation down to 2 percent, pledging to "keep at it until the job is done."

Powell suggested the Fed will need to raise rates to a "restrictive level" and keep them there "for some time" in order to combat elevated inflation.

The Fed chief also said reducing inflation will likely require a "sustained period of below trend growth," which he acknowledged could lead to "some softening of labor market conditions."

The occasional bouts of buying seen after the Fed announcement may have reflected optimism that the markets now have a clearer roadmap for future rate hikes.

Sector News

Airline stocks moved sharply lower over the course of the session, resulting in a 3.4 percent nosedive by the NYSE Arca Airline Index. The index tumbled to a nearly two-month closing low.

Substantial weakness was also visible among biotechnology stocks, as reflected by the 2.5 percent plunge by the NYSE Arca Biotechnology Index, which hit its lowest closing level in nearly three months.

Banking stocks also came under pressure following the Fed announcement, dragging the KBW Bank Index down by 2.1 percent to a two-month closing low.

Chemical, oil service, steel and retail stocks also finished the day's extremely volatile session firmly in negative territory.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Wednesday. Japan's Nikkei 225 Index tumbled by 1.4 percent, while Hong Kong's Hang Seng Index plunged by 1.8 percent.

Meanwhile, the major European markets moved to the upside on the day. While the French CAC 40 Index advanced by 0.9 percent, the German DAX Index climbed by 0.8 percent and the U.K.'s FTSE 100 Index rose by 0.6 percent.

In the bond market, treasuries saw substantial volatility following the Fed announcement before closing firmly positive. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, slid 6.1 basis points to 3.510 percent after reaching a new eleven-year intraday high of 3.620 percent

Looking Ahead

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, while traders are also likely to keep an eye on reports on weekly jobless claims and leading economic indicators.

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