Wall Street whipsaws as investors bet Fed may slow rate increases

US stocks swung between gains and losses on Wednesday as investors struggled to gauge how quickly and how high the Federal Reserve would raise its benchmark policy rate, after the central bank delivered its fourth supersized rate rise in a row.

Wall Street’s benchmark S&P 500 swung from a 1 per cent advance to a loss of 1.2 per cent after Fed chair Jay Powell said it was “very premature” for the central bank to think about pausing rate increases. The tech-heavy Nasdaq Composite dropped 1.7 per cent.

Just minutes earlier, the Fed lifted rates 0.75 percentage points to between 3.75 per cent and 4 per cent and stocks had jumped as policymakers hinted they could soon slow the pace of future increases. Interest rates stood near zero at the end of last year.

In a statement alongside the widely expected rate rise, the central bank said it expected to continue increasing rates but would “take into account . . . the lags with which monetary policy affects economic activity and inflation”. Markets have rallied in recent weeks on any signs that policymakers will rein in the pace of further rate rises.

“The front loading [of rate increases] is essentially over and rate hikes from here will be more cognisant of the new economic environment we’re in with respect to the much higher cost of capital and economic clouds that are circling,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “This is the Fed’s way of telling us that a slowdown in the pace of future hikes is upon us.”

Line chart of Performance on November 2 2022 (%) showing US stocks whipsaw as Fed's Powell speaks

The Fed has aggressively lifted rates this year in an attempt to tame stubbornly high inflation, but concerns have grown that the central bank will tighten policy too far and push the US and global economy into a recession.

Paul Ashworth, chief North America economist at Capital Economics, said that “with rates now well into restrictive territory, the Fed can afford to slow the pace of rate hikes, partly to assess what impact the near [4 percentage points] of cumulative tightening is having”.

Government bond prices also whipsawed after the Fed decision. The yield on the 10-year US Treasury, which had dropped as low as 3.97 per cent, then surged back to 4.06 per cent. The two-year yield, which is particularly sensitive to monetary policy expectations, rose 0.03 percentage points to 4.57 per cent.

Line chart of Federal funds target rate (upper bound) %  showing The Fed has sharply lifted borrowing costs this year

Elsewhere, Chinese equities rose, consolidating gains made in the previous session as unsubstantiated rumours that the country was seeking to end its strict zero-Covid policy boosted investor sentiment.

Hong Kong’s Hang Seng index was up 2.4 per cent, while China’s CSI 300 added 1.2 per cent. The two indices respectively closed 5.2 per cent and 3.6 per cent higher on Tuesday. Elsewhere in Asia, Japan’s Topix added 0.1 per cent. The regional Stoxx Europe 600 fell 0.3 per cent.

Read More: Wall Street whipsaws as investors bet Fed may slow rate increases

2022-11-02 12:21:10

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