The Federal Reserve on Wednesday unexpectedly signaled its intent to hike rates twice in 2023 amid higher inflation. The S&P 500, modestly lower ahead of the Fed’s 2 p.m. Eastern Time policy statement, extended losses. Treasury yields rose modestly.
The Federal Reserve’s post-meeting policy statement indicated that the U.S. economy had yet to make “substantial further progress” toward the Fed’s goal of maximum employment. That omission means the Fed is not yet ready to offer a schedule about when it will begin tapering its asset purchases.
Fed chief Jerome Powell elaborated that committee members agreed that sufficient progress is “still a ways off.” But they’ll continue to evaluate whether the standard has been met, meeting by meeting.
Yet all of the other Fed policy signals turned more hawkish. The Fed’s quarterly economic projections showed that policymakers, as a group, see inflation pressures as somewhat more persistent. Plus, seven of 18 policymakers indicated a view that the Fed should start hiking rates in 2022. That group included just 4 of 18 members in March.
The Fed now expects its favored gauge of core inflation to rise 3% this year, up from a 2.2% estimate in March. Policymakers continue to see core inflation subsiding in 2022, but only to 2.1%, not 2% as in the March projections.
S&P 500, 10-Year Treasury Yield Reaction To Federal Reserve Meeting
The S&P 500 index, off about 0.3% ahead of the Fed releases, traded down 0.9%, near session lows. The Dow Jones and Nasdaq were off about 1%.
The S&P 500 hit a fresh high Tuesday morning, while the big-tech-heavy Nasdaq 100 notched an all-time record on Tuesday.
The 10-year Treasury yield rose to 1.57% after the Fed meeting statement. The 10-year yield traded near a 3-month low around 1.49% before the statement. Investors are taking Fed chief Powell at his word that the central bank won’t react to what policymakers see as mostly a transitory rise in inflation.
Why Did Federal Reserve Shift Outlook Now?
The surprise is that the Fed indicated a policy shift on interest rates, even before it did so on asset purchases.
The apparent reason is that Fed chief Powell no longer has a lock on policy. More and more policymakers are getting antsy about the extent of the rise in inflation and the appropriateness of Fed policy.
Now just 5 of 18 policymakers see fit to hold the benchmark rate steady until 2024, given what they know now. It’s a good bet that Powell is one of those five outliers.
Powell noted improvement in pandemic-hit areas like restaurants. That recovery also has likely assured policymakers that there’s not much risk in signaling a future change in policy now.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
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