US Stocks Fall Following Fed Rate Hike – Dow down 1.2%
US equity markets finished lower yesterday after the Federal Reserve delivered its widely anticipated 25-basis-point interest rate hike and indicated that at least one further increase is likely before the end of the year.
The Dow Jones recorded the largest decline, falling 1.21% to close at 51,461, while the S&P 500 lost 0.45% to finish at 7,551. The Nasdaq proved considerably more resilient, ending the session just 0.01% lower at 25,978.
US Treasury yields moved higher following the Federal Reserve announcement, with the most significant move occurring at the short end of the curve as markets adjusted expectations for the future path of monetary policy. The policy-sensitive 2-year Treasury yield rose 7.4 basis points to 4.737%, while the benchmark 10-year yield increased 2.1 basis points to 5.023%.
The US dollar also strengthened sharply against the major currencies as the Fed maintained a relatively hawkish outlook. The USD Index gained 0.71% to close at 100.33, supported by the rise in Treasury yields and expectations that US interest rates could remain elevated for longer.
Oil prices moved sharply lower after reports indicated that Saudi Arabia could use Oman as an alternative route for some crude exports, potentially easing concerns over supply disruptions in the region. Brent crude fell 2.97% to $105.52 per barrel, while WTI declined 3.54% to $102.08.
Gold experienced significant volatility around the Federal Reserve decision. The precious metal had traded higher for much of the session before falling more than 2% following the announcement as both the US dollar and Treasury yields moved sharply higher.
Dollar Strengthens as Fed Delivers Hawkish Rate Hike
The US dollar strengthened against the major currencies overnight after the Federal Reserve delivered a widely anticipated 25-basis-point interest rate hike and signalled that further tightening is likely in the months ahead.
The FOMC voted unanimously to raise the federal funds target range to 3.75%-4.00%, its first rate increase in more than three years, as policymakers continue to battle elevated inflation.
While the hike itself had been largely priced into markets, the more significant driver for the dollar was the Fed’s updated projections. Sixteen of the 18 policymakers submitting rate forecasts expect at least one further 25-basis-point increase before the end of the year, with the median projection pointing to rates around 4.1% at year-end.
The hawkish message pushed US yields higher at the short end of the curve and provided fresh support for the greenback. The Dollar Index gained around 0.7% to trade close to a five-week high, while the euro, sterling and yen all weakened against the US currency.
Traders are now expecting the dollar to remain bid in the sessions ahead as the market adjusts to the Fed update, and the move could accelerate if the DXY pushes to fresh highs in the hours ahead.
Another Busy Day Ahead for Markets
Markets are expected to remain active today as investors continue to assess the implications of the Federal Reserve’s latest decision and guidance for the remainder of the year, as well as any further geopolitical updates. Attention will then shift to the Bank of England during the European session, with the bank largely expected to keep rates on hold at this meeting.
The US session will also feature Weekly Unemployment Claims (exp 207k) and the Philadelphia Fed Manufacturing Index (exp 31.3), providing further insight into the strength of the US economy following the Fed’s latest policy move.
Explore all upcoming market events in the Economic Calendar.
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