[New York Stock Market] Decline on Fed's Additional Rate Hike Warning... Nasdaq Down 1.53%

The three major indices of the U.S. New York stock market all closed lower on the 20th (local time) as the Federal Reserve (Fed) signaled additional interest rate hikes and a prolonged period of high rates at the September Federal Open Market Committee (FOMC) meeting.

On this day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average closed at 34,440.88, down 76.85 points (0.22%) from the previous session. The large-cap-focused S&P 500 index fell 41.75 points (0.94%) to 4,402.20, and the tech-heavy Nasdaq index dropped 209.06 points (1.53%) to 13,469.13. The Nasdaq index widened its losses after the Fed’s announcement in the afternoon, and the S&P 500 turned negative.

Within the S&P 500, technology, communication, and materials stocks saw notable declines. Microsoft fell 2.40%, and Google Alphabet dropped 3.12%. Intel declined nearly 5% amid concerns over inventory depletion. Instacart, which was listed on Nasdaq the previous day, fell more than 10%. Semiconductor design company Arm also dropped over 4%, approaching last week’s IPO price of $51. Klaviyo, which debuted trading on this day, closed at a level 9.20% above its IPO price of $30. Steelcase surged more than 19% on the back of stronger-than-expected earnings guidance. Pinterest rose over 3% amid forecasts of accelerated revenue growth starting next year.

[Image source=Getty Images Yonhap News]

Investors closely watched the FOMC results, dot plot, and Fed Chair Jerome Powell’s press conference released in the afternoon. The Fed kept the federal funds rate unchanged at 5.25?5.5%, as the market had anticipated. However, the Fed made it clear in the policy statement and Powell’s remarks that the rate hike cycle is not yet over. The phrase “additional policy firming” remained in the policy statement. The economic assessment was revised from “moderate” to “solid,” confirming that the U.S. economy is stronger than expected.

In the subsequent press conference, Chair Powell said, “If necessary, we could raise rates once more in one of the remaining two meetings this year,” adding that “the majority opinion of the FOMC is to raise rates once more.” He stated, “We want to see convincing evidence that we have reached a sufficiently restrictive level,” and noted, “Inflation has eased but there is still a long way to go to reach the 2% target.”

He also expressed concern, saying, “The worst outcome for us would be failing to restore price stability,” adding, “In that case, inflation would reemerge, economic uncertainty would persist for a long time, and growth would be affected. It could be a miserable period of continuous tightening due to endless inflation.” This was a message that the Fed will not repeat past mistakes of prematurely halting tightening only to see inflation rise again. Additionally, he warned of “a lot of uncertainty” regarding the ongoing United Auto Workers strike, the possibility of a federal government shutdown, the resumption of student loan repayments, and high oil prices.

In the newly released dot plot, the Fed maintained the median year-end rate forecast for this year at 5.6%, unchanged from the previous projection. However, the median rate forecast for the end of 2024 was raised from 4.6% to 5.1%, and for the end of 2025 from 3.4% to 3.9%. This indicates that even after rate cuts begin, high rates will persist longer than expected. The expected rate cut magnitude next year was also reduced to 0.5 percentage points. Alongside this, the Fed raised its forecast for the personal consumption expenditures (PCE) inflation rate for the end of this year from 3.2% to 3.3%, and the gross domestic product (GDP) growth forecast from 1.0% to 2.1%.

Edward Moya, senior market analyst at OANDA, said, “The U.S. economy is too strong,” and assessed that “this rate hike cycle will last much longer than Wall Street wants.” David Russell, global market strategist at TradeStation, said, “The Fed’s slightly hawkish message reflects the economic strength we have seen since the last FOMC,” adding, “With rising oil prices and wage and price hike concerns due to the auto workers strike, policymakers have no reason to show dovish attitudes.” Will Compernolle, macro strategist at FHN Financial, described it as the “hawkish hold we expected,” and predicted, “There may be additional rate hikes early next year.”

There are two remaining FOMC meetings this year, in November and December. Key economic data before the November FOMC include the September 29 PCE price index, October 6 nonfarm payroll report, October 11 producer price index (PPI), and October 12 consumer price index (CPI). The market still largely expects a hold in November. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures on this afternoon reflected over a 71% probability that the Fed will hold rates steady in November.

Following the Fed, central banks in Brazil, Indonesia, Japan, Norway, South Africa, Sweden, Switzerland, Taiwan, and the United Kingdom will hold monetary policy meetings this week. The UK’s August CPI inflation rate, released on this day, fell to its lowest level since February last year, fueling market speculation that the Bank of England (BOE) may end its rate hike cycle sooner than expected. However, unlike the Fed, which is expected to hold, the BOE is widely expected to deliver an additional “baby step” rate hike of 0.25 percentage points on the 21st.

In the New York bond market, government bond yields rose. The benchmark 10-year Treasury yield jumped to around 4.39%, marking the highest level since November 2007. The 2-year Treasury yield, sensitive to monetary policy, reached about 5.16%, the highest since July 2006. The dollar index, which measures the value of the U.S. dollar against six major currencies, rose more than 0.15% to around 105.3.

Oil prices fell on the Fed’s signal of additional rate hikes. On the New York Mercantile Exchange, October delivery West Texas Intermediate (WTI) crude oil closed at $90.28 per barrel, down 92 cents (1.01%) from the previous month. However, it remains the fourth highest closing price this year.