US stocks wavered on Wednesday after the Federal Reserve announced its latest increase in interest rates and investors awaited more detailed guidance from central bank chair Jay Powell.
The US central bank on Wednesday afternoon lifted its benchmark interest rate by 0.25 percentage points to a range of 4.5 per cent to 4.75 per cent, the highest level since September 2007.
Wall Street’s benchmark S&P 500 index dipped in the immediate aftermath of the announcement before recovering most of the losses to a 0.2 per cent decline in mid-afternoon trading. The tech-heavy Nasdaq Composite erased its early declines to trade 0.2 per cent higher.
The widely expected 0.25 percentage-point move in the federal funds rate marked a slowdown in the pace of increases after a series of 0.5 and 0.75 percentage point rises initiated last year.
The smaller increase reflects growing confidence that inflation is on a downward trajectory after several months of encouraging data, but the central bank’s statement continued to stress that “ongoing increases in the target range will be appropriate”.
The dollar index, which tracks the US currency against a basket of peers, fell 0.2 per cent, while the benchmark 10-year Treasury yield slipped 0.05 percentage points to 3.48 per cent. Bond yields fall when prices rise.
Investors will be focused on the language deployed by Powell in his press conference later on Wednesday afternoon.
“We expect Powell’s comments will be quite hawkish in order to underscore that slowing is not stopping, and to discourage markets from expecting rate cuts in 2023,” said analysts at JPMorgan. Despite a more “encouraging” economic outlook, Powell is expected to point yet again to the “historical costs of easing too soon”.
Indeed, Spain’s inflation rate rose 5.8 per cent in the year to January, up from 5.5 per cent in December, according to preliminary figures published by its national statistics office on Monday, and “served as another reminder that the assumptions of having already achieved this ‘immaculate disinflation’ glide-path will not be a one-way easy sailing trajectory in reality”, said Charlie McElligott, analyst at Nomura.
The Bank of England and European Central Bank are due to implement their own interest rate increases on Thursday, with both expected to opt for half percentage-point adjustments upwards.
The regional Stoxx Europe 600 traded flat after eurozone inflation fell more than expected to 8.5 per cent in January, down from 9.2 per cent in December. Economists polled by Reuters had forecast a decline to 9 per cent. Core inflation, which omits relatively volatile food and energy prices, remained at 5.2 per cent, with investors having expected a decline to 5.1 per cent. London’s FTSE 100 also fell 0.1 per cent.
In Asia, Hong Kong’s Hang Seng index added 1 per cent, China’s CSI 300 rose 0.9 per cent and South Korea’s Kospi gained 1.2 per cent. Japan’s Nikkei was steady.
