Hawkish Fed “Breaks” Market

Tech stocks were in the doghouse this morning, dragging down the broader market, as yields popped. The S&P 500 sank 1.1%, while the Dow Jones Industrial Average dropped 0.6%. The Nasdaq fell almost 1.3%, leading the market lower. Wall Street’s jitters stem from the Federal Reserve’s recent decision to hold interest rates steady, but with a hawkish tone that suggests more hikes are on the table.

The Fed didn’t budge on rates but did signal another hike is in the cards for later this year. Twelve members of the FOMC are in favor of one more rate hike this year, while seven want to keep rates steady. “It’s more about stronger economic activity,” said Fed Chair Jerome Powell, “if I had to attribute one thing.” Powell emphasized that the central bank is “highly attentive” to inflation risks, even as they lowered their inflation outlook to 3.7% for the year, down from a June forecast of 3.9%.

Investors are now recalibrating their expectations. Goldman Sachs has pushed its forecast for a Fed rate cut to the fourth quarter of 2024. The yield on the 10-year Treasury touched its highest level in over 15 years, adding to the market’s unease. Powell stressed that policy will hinge on economic data, pointing to recent figures that showed jobless claims hitting their lowest level since January.

“We are fairly close, we think, of where we need to get,” Powell said, adding that “the worst thing we can do is fail to restore price stability because the record is clear on that. If you don’t restore price stability inflation comes back and you can have a long period where the economy is just very uncertain.”

He continued, concluding:

“It can be a miserable period to have inflation constantly coming back and the Fed coming in and having to tighten again.”

Across the pond, the Bank of England also held rates steady, pausing after 14 consecutive hikes due to an unexpected slowdown in inflation. Other European central banks threw curveballs; the Swiss National Bank kept rates steady, while Norway’s central bank hinted at another rate hike in December.

The market’s reaction? A retreat led by tech stocks, as investors grapple with the prospect of “higher for longer” interest rates. The Fed’s hawkish stance has traders rethinking their positions, especially in sectors like tech that are sensitive to rate changes. The tug-of-war between inflation concerns and economic growth continues, and traders are stuck in the middle, recalibrating strategies on the fly.

The question is whether we’re back to “bad news is bad news.” US GDP is set to be revised late next week, and many analysts are predicting a major downward revision. If that happens, we’ll find out how the market feels about poor economic data. Odds are that bad news will truly be received as bad news until the next Fed meeting in November, where the market anticipates just a 26% chance of a hike according to the CME Group’s FedWatch tool.


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