Tech Giants Tumble. In a closely watched decision, the Federal Reserve’s Federal Open Market Committee (FOMC) met on Wednesday, leaving the market with mixed sentiments. The Dow Jones Industrial Average closed 76 points lower, while the S&P 500 and the Nasdaq saw declines of 0.9% and 1.5%, respectively.
This market reaction came as investors assessed the Federal Reserve’s monetary policy outlook following its widely expected decision to keep the funds rate steady at 5.5%. The FOMC did, however, pave the way for another rate hike later in the year and projected two rate cuts for 2024. Additionally, median projections by FOMC policymakers now anticipate an interest rate of 5.1% by the end of the next year, which is 50 basis points higher than the June projections.
Rate-sensitive sectors felt the pressure as technology giants like Alphabet, Apple, Microsoft, Amazon, and Nvidia all dropped by over 1.5%. Meanwhile, Instacart saw a notable tumble of 10.7%, following a 12% surge on its first trading day on the Nasdaq.
The yield on the US 10-year Treasury note remained at 4.35%. Hovering near a 16-year high reached in the previous session. This resilience comes after a hawkish FOMC statement continued to drive selling pressure in the secondary market for government bonds.
Federal Reserve’s Hawkish Tone
Despite market expectations of a steady rate, the Federal Reserve surprised investors with a hawkish tone, signaling the possibility of a rate hike as early as November due to rising inflationary risks. The Summary of Economic Projections reflected the Fed’s confidence in the economy. With policymakers maintaining their terminal rate forecasts at 5.6%.
Additionally, they reduced the extent of rate cuts projected for next year. Raising the 2024 projections by 50 basis points to 5.1%. This reinforced the notion that borrowing costs are likely to remain higher for a more extended period than previously thought.
The FOMC’s economic projections suggest a more robust economic performance. They expect the US GDP to grow by 2.1% this year and 1.5% next year. Significantly higher than June’s respective forecasts of 1% and 1.1%. Furthermore, the unemployment rate for 2024 was revised lower to 4.1%, both for 2024 and 2025. Meanwhile, the yield curve inversion widened, with the yield on the 2-year note reaching 16-year highs. Indicating the market’s expectations of higher short-term interest rates.
Gold initially experienced gains but remained around the $1940 an ounce level after the Fed’s decision. The uncertainty around future interest rate increases and the Fed’s hawkish stance kept gold prices relatively steady.
The euro fell below $1.07 against the US dollar following the Federal Reserve’s announcement. The dot-plot projections showed the likelihood of one more interest rate increase in the US this year and only two cuts in 2024. This contrasts with the European Central Bank’s recent decision to increase rates by 25 basis points, signaling a potentially completed tightening cycle.
Investor attention now turns to the Bank of England’s upcoming decision on monetary policy, with the central bank expected to decide whether to raise rates again or pause the rate-hike campaign. Additionally, the Bank of Japan is set to provide an update on its monetary policy on Friday.
The Federal Reserve’s latest policy announcement has left investors with much to digest. While the central bank’s decision to hold rates steady was widely anticipated, the hawkish tone and economic projections have raised expectations of future rate hikes. This has triggered a range of reactions in financial markets, from stock market declines to bond market volatility and shifts in currency values. The path forward remains uncertain, as the Fed continues to navigate the delicate balance between supporting economic growth and addressing inflationary pressures.