Wall Street stocks edge higher after Fed’s latest rate rise
US stock and government bond prices picked up on Wednesday after the Federal Reserve announced another rise in interest rates to fight inflation, despite recent problems in the banking sector.
The benchmark S&P 500 index briefly jumped before falling back to a 0.1 per cent gain shortly after the decision was announced in Washington, having dipped slightly earlier in the day. The tech-heavy Nasdaq Composite rose 0.2 per cent.
The Federal Open Market Committee lifted the federal funds rate 0.25 percentage points, to a target range of 4.75 per cent to 5 per cent.
Investors in interest rate futures had tentatively priced in such an increase, but analysts and economists had been unusually divided in their predictions due to the recent market turmoil. The collapse of Silicon Valley Bank and UBS’s takeover of Credit Suisse has led many investors to scale back their expectations for how long the Fed will keep rates at elevated levels.
“There are great uncertainties as to whether the Fed can both tighten and simultaneously try to ease the stress for, among other things, the regional banks,” said analysts at SEB Research.
In its statement on Wednesday, the Fed signalled that it still expected to increase rates again, but noted that recent developments were likely to “weigh on economic activity, hiring and inflation”.
Fed chair Jay Powell is expected to provide further guidance at a press conference later on Wednesday afternoon.
The yield on the benchmark 10-year Treasury fell 0.07 percentage points to 3.54 per cent, while the more policy-sensitive two-year yield declined 0.11 percentage points, to 4.07 per cent. Lower yields reflect higher prices.
The central bank also published revised projections about the path for monetary policy to 2025, along with updated forecasts for growth, unemployment and inflation.
Most officials maintained their forecast for interest rates to peak at between 5 per cent and 5.25 per cent, but predicted that the rate would fall back down to 4.3 per cent by the end of next year.
Shares in US banks gave up some of their gains after reassuring comments from Treasury secretary Janet Yellen prompted a strong rally on Tuesday. The KBW Nasdaq Bank index dipped 1.7 per cent. Shares in First Republic, the hardest hit among regional banks that have been suffering massive outflows of deposits, fell 3 per cent.
“Panic over the banking system has definitely eased, largely due to the aggressive policy response from Federal Reserve, Federal Deposit Insurance Corporation and Treasury,” said Ryan Sweet, chief US economist at Oxford Economics.
European equities closed higher. The region-wide Stoxx 600 rose 0.2 per cent and the CAC 40 in Paris finished 0.3 per cent higher.
London’s FTSE 100 rose 0.4 per cent after UK inflation unexpectedly jumped to 10.4 per cent in February, bolstering market expectations that the Bank of England would increase its benchmark interest rate on Thursday. Investors now expect a quarter-point rate rise from the BoE.
Neil Birrell, chief investment officer for Premier Miton, said the BoE faced a similar challenge to the Fed. “The equation is raising rates to beat inflation, but not squash the economy and make sure the financial system remains robust — that makes everything more difficult.”
Sterling rose 0.5 per cent against the dollar, approaching a two-month high, while the yield on the 10-year gilt rose 0.09 percentage points to 3.45 per cent. The yield on two-year gilts rose 0.2 percentage points to 3.48 per cent.
European Central Bank president Christine Lagarde on Wednesday warned of a “tit-for-tat” dynamic between workers and companies that shifts up profit margins and wages, increasing price pressures as both groups try to avoid a hit from higher inflation. Her comments helped push the euro up to a five-week high of $1.084.
Asian stocks advanced, with Hong Kong’s Hang Seng index adding 1.7 per cent and South Korea’s Kospi rising 1.2 per cent. Japan’s Topix jumped 1.7 per cent after markets reopened following a one-day break for the vernal equinox holiday.