The Federal Reserve defied expectations that it would change the timing of its first interest rate hike, even when the US economy looks set to take off. The Fed held on to 2024 for its first tightening, with the 10-year Treasury yield reaching its highest level since Covid emerged in the U.S.
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The Dow Jones rebounded after the Fed meeting policy statement, while Nasdaq reduced losses by raising long-term interest rates.
Dow Jones, Nasdaq, Treasury Yield Reaction To Fed Meeting
The Dow Jones rose 0.4% after the 14:00 Eastern Time policy statement and the release of quarterly economic projections. The Nasdaq fell 0.2%, reducing sharp morning losses, while the Dow Jones was traded near record territory in Wednesday’s stock market action. Nasdaq recovered its 50-day moving average after reducing it.
Recent divergences in the indexes arise as strong growth increases the prospects for profits in cyclical sectors, including oil, machinery, industrial and financial commodities. Meanwhile, rising long-term interest rates are hurting valuations of growth stocks.
The 10-year Treasury yield rose by as much as 7 basis points intraday to 1.69% intraday, breaking through to a new high in the Covid era as Wall Street prepared for Fed news. It was traded at 1.66% after the Fed announcement, little change from the pre-launch period. The Treasury’s 10-year yield has now risen 70 basis points since Democrats won two run-off Senate elections on Jan. 5, reviving President Joe Biden’s fiscal plans.
The post-meeting press conference by Fed chief Jerome Powell, starting at 2:30 pm, tends to move the market so prices can remain volatile.
Federal Reserve rate hike projections
New quarterly projections show that most members of the Fed’s policy committee – 11 out of 18 – still forecast the first rate hike in 2024. The other seven members expect at least a rate hike in 2023.
In December, projections showed that only five of the FOMC’s 17 members marked an increase in rates in 2023.
In his press conference, Powell could comment on whether policymakers have incorporated the next fiscal package into their assessments. Goldman Sachs hopes that later this year Democrats will approve a new $ 4 trillion stimulus over a decade, with anticipated infrastructure spending. Tax increases will offset part of the cost.
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Financial markets are more aggressive than the Fed
Financial markets are already way ahead of the Fed in pricing in the monetary tightening. On Tuesday, the price of federal fund fees showed that “the market is looking to take off in January 2023, followed by two more rate hikes before the end of that year,” wrote BCA Research.
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