US stocks rose on Wednesday afternoon as investors considered the Federal Reserve’s latest decision. At the same time, the central bank raised interest rates by 75 basis points, or the most since 1994, and suggested that such a move could take place next month.
The S&P 500 jumped more than 1.5% at 15:08 ET and was on the verge of ending a five-day losing streak. The Nasdaq Composite rose to the highest of the session, rising 3.5 percent, while Federal Reserve Chairman Jerome Powell spoke at a news conference. The Dow jumped about 1% during the day.
Government bond yields remained lower, with the 10-year reference yield retreating from a peak of more than a decade to remain at just over 3.4%. The two-year yield-sensitive monetary policy also retreated from a 15-year high. Bitcoin prices (BTC-USD) remained in the red after sinking to a new low in December 2020 from just over $ 20,000 earlier in the day.
The Federal Reserve chose to raise interest rates by 75 basis points in June, after rising by 50 basis points in May. During a press conference Wednesday afternoon, Fed Chairman Jerome Powell also said that raising the interest rate by 50 or 75 basis points “seems most likely” for the next Fed meeting in July, thus suggesting even greater An increase in the interest rate by the full percentage point is unlikely in the short term.
Investors have begun pricing with an increased probability of raising interest rates by 75 basis points over the past few days, as recent economic data suggests that the Fed’s previous, more measured interest rate moves have so far contributed little to tackling inflation. Consumer prices rose unexpectedly to set a new 40-year high in May. Other recent data also show that consumers’ short-term expectations of inflation have risen to near or forever highs.
The Fed also raised its inflation forecast for the current year. The average member of the Federal Open Market Committee sees that basic personal consumption expenditure (PCE), the Fed’s preferred indicator of core inflation, will rise by 4.3% in 2022. This is compared to an estimate of 4.1% in March, the last time the Fed provided an updated set of projections. For 2023, the Fed sees an increase in the core PCE of 2.7%, before slowing to 2.3% in 2024.
The story continues
At the same time, however, the Fed’s assumptions about US GDP and unemployment have worsened this month compared to March. The average FOMC member now sees real GDP growing by 1.7% this year and in 2023, which is significantly lower than the previous average of 2.8% and 2.2%, respectively. The Fed also sees that the unemployment rate will rise to 3.7% by the end of this year, instead of falling back to the pre-pandemic lows of a few decades of 3.5%, as the Fed predicted in March.
Traders are working on the floor of the New York Stock Exchange (NYSE) on June 14, 2022 in New York. (Photo by Spencer Platt / Getty Images)
And at the start of Wednesday’s ruling, some experts did not support an increase of less than 75 basis points and questioned whether it would ultimately have a net positive effect on the economy. The Fed’s decision on interest rates was also unanimous, with the Kansas City Federal Reserve chairman disagreeing and choosing to increase the interest rate by 50 basis points instead.
The risk of over-tightening the Fed or raising interest rates faster than markets and the economy can adjust could ultimately do more harm than good, some strategists said ahead of Wednesday’s ruling. In a news conference, Powell also suggested recognizing this balancing act, noting, “There’s always a risk of going too far or not going far enough,” adding that failing to restore price stability would be the worst mistake. which we can do. ” And the economy is already showing signs of easing: a new report on Wednesday morning showed that US retail sales fell unexpectedly in May as rising gas prices forced consumers to cut spending in other areas.
“Our objection to this more aggressive action is that it is unnecessary, as the forces that led to the recent inflation are already fading,” wrote Ian Shepardson, chief economist at Pantheon Macroeconomics, in a note Wednesday before announcing the Fed’s decision. “Slower wage gains, coupled with a tumultuous housing market, will dampen rental growth, while airline prices are likely to fall in the summer as a result of falling jet fuel prices and vehicle prices will fall as rising prices rise.” stocks.
“Adjusting inflation will not be more effective if the Fed rises by 75 bp [basis points] today or next month, not 25 bp, and the damage done to private sector wealth could inadvertently cause a decline that would otherwise have been prevented, “Shepardson added.” Less is not always more, but sometimes enough . “
In motion
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Shares of Boeing (BA) added to gains on Tuesday after the company said it delivered a total of 35 aircraft in May, more than doubling last year’s number of 17. Most of them are for its lucrative 737 Max aircraft. Separately, The Seattle Times, citing an employee of the Federal Aviation Administration, said that Boeing may be able to resume deliveries of 787 Dreamliner in the coming weeks.
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Shares of Revlon (REV) rose sharply for the second day in a row, gaining 17% during the day to build up almost 60% earnings on Tuesday. Shares reported their biggest one-day decline in history last week, falling more than 50 percent in one day after the cosmetics company reportedly was preparing to file for bankruptcy under Chapter 11.
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Shares of Baidu (BIDU) rose after Reuters reported that the Chinese internet giant is in talks to sell its majority stake in streaming business iQiyi. The deal is estimated to cost the company about $ 7 billion.
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.
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