[New York Stock Market] Fed's 'Hawkish Pause' Leads to Mixed Close... Nasdaq Up 0.39%

The three major indices of the U.S. New York stock market closed mixed near the flat line on the 14th (local time) as the central bank, the Federal Reserve (Fed), kept the benchmark interest rate unchanged as expected. The S&P 500 and Nasdaq indices, which had plunged in surprise at the dot plot forecasting two additional hikes this year, rebounded during Fed Chair Jerome Powell's press conference. Unlike the hawkish dot plot, Powell's remarks were considered less hawkish than expected.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 33,979.33, down 232.79 points (0.68%) from the previous session. The S&P 500 rose 3.58 points (0.08%) to 4,372.59, and the Nasdaq increased 53.16 points (0.39%) to 13,626.48.

In the S&P 500, energy, healthcare, financials, and materials stocks fell, while technology, consumer staples, and real estate stocks rose. Tesla, which had recorded the longest rally in history with 13 consecutive trading days until the previous day, closed down 0.74%. Nvidia, which surpassed a market capitalization of 10 trillion won thanks to the AI boom, jumped nearly 5% again that day. AMD rose more than 2% on reports that Amazon Web Services is considering using AMD's new AI chip. Alphabet (Google) showed a slight decline after the European Union (EU) issued an antitrust report stating it violated antitrust laws in the digital advertising market.

[Image source=Reuters Yonhap News]

Investors closely watched the results of the June Federal Open Market Committee (FOMC) regular meeting, the dot plot, economic outlook, and Powell's press conference released that afternoon. The Fed kept the federal funds rate unchanged at 5-5.25% in this meeting. After raising rates 10 consecutive times from March last year to May this year, the Fed finally skipped a rate hike, marking its 'first pause.'

This rate hold was already anticipated. However, what surprised the market was the hawkish dot plot. The Fed raised its year-end rate forecast to 5.6%, confirming that the tightening cycle is not over yet. This is significantly higher than the 5.1% year-end rate forecast in the March dot plot. It signaled the possibility of two more baby steps (0.25 percentage point rate hikes) within the year. This is the so-called 'hawkish pause' card, which skips the rate hike this time while signaling additional hikes, as Wall Street had expected.

In the subsequent press conference, Chair Powell expressed concerns about inflation not falling as much as expected, saying, "Despite raising the policy rate by 5 percentage points and rapidly shrinking the balance sheet, the full effect of tightening has not yet been felt." He explained, "Almost all (FOMC) participants see additional rate hikes this year as appropriate," and "Future direction will be considered based on policy lags and data." Regarding the possibility of resuming hikes from the next meeting in July, he said, "No decision has been made yet, and it will be a live meeting." The next FOMC meeting will be held on July 25-26.

According to the newly released dot plot that day, more than half of the 18 FOMC members, nine, expected the year-end rate level to be 5.50-5.75%. One member forecasted 6.0-6.25%, and two members forecasted 5.75-6.0%. This is interpreted as reflecting the still sticky core inflation and the overheating labor market, as Powell pointed out. Through the economic outlook update, the Fed lowered the year-end personal consumption expenditures (PCE) inflation forecast by 0.1 percentage points to 3.2%, but raised the core inflation forecast to 3.9%. At the same time, the real GDP growth forecast for this year was raised to 1.0% from the previous 0.4%. The unemployment rate forecast for this year was lowered from 4.5% to 4.1%.

The market largely expects a baby step in July. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market currently reflects nearly a 65% chance that the Fed will raise rates by 0.25 percentage points in July. Ed Moya, senior market analyst at OANDA, told CNBC, "The outlook is so hawkish that Wall Street probably thinks the Fed should have raised rates today."

The Producer Price Index (PPI) for May, released that morning, reaffirmed the inflation slowdown signal following the Consumer Price Index (CPI) the previous day. May PPI rose 1.1% year-on-year, marking the lowest increase since 2020. The month-on-month increase fell 0.3%, showing a larger drop than the market expectation of -0.1%. It turned to a decline from a 0.2% increase in April. Since PPI is generally considered a leading indicator of consumer prices, market expectations for a future inflation slowdown trend are growing.

Immediately after the announcement of the rate hold and the upward revision of the dot plot, the New York stock market fell across the board. The impact of the dot plot forecasting two additional hikes was significant. However, as Powell gave ambiguous answers during the press conference, the market took a more optimistic view, and the S&P 500 and Nasdaq indices rebounded. Anthony Saglimbene, chief market strategist at Ameriprise Financial, told CNBC, "I think Powell helped during the press conference," and "The Fed's policy is on the trajectory the market expects." Both the press conference and the economic outlook suggested that a soft landing is still possible, which also positively influenced the market. Analyst Moya said, "The statement and dot plot are very hawkish, but Powell's remarks were somewhat optimistic."

In the New York bond market, the 10-year U.S. Treasury yield fell to around 3.79%. The 2-year Treasury yield, sensitive to monetary policy, remained steady at around 4.69%. The dollar index, which shows the value of the dollar against the six major currencies, moved around 103, down more than 0.3% from the previous session. The Volatility Index (VIX), known as Wall Street's fear gauge, fell more than 5% to around 13, below the long-term average of 20.

Oil prices fell on the possibility of additional rate hikes. On the New York Mercantile Exchange, the price of West Texas Intermediate (WTI) crude oil for July delivery closed at $68.27 per barrel, down $1.15 (1.66%) from the previous session.