Stock Market Today: Dow Falls After Fed Raises Rates, Signals Economic Pain Ahead

Stocks ended in the red Wednesday after the Federal Reserve’s decision to lift its benchmark lending rate by a half-percentage point. Wall Street made clear it has lingering worries about rates climbing even higher—and not coming back down.

The Dow Jones Industrial Average fell 142 points, or 0.4%. The S&P 500 dropped 0.6% and the Nasdaq Composite declined 0.8%. The indexes had been solidly in the green before the central bank’s announcement.

The latest increase is smaller than the previous four, which each were three-quarters of a percentage point. The central bank started raising rates in early spring to try to cool red-hot inflation. New government data out Tuesday showed a 7.7% gain in prices year over year in November, significantly lower than the peak 9% increase in this summer. The rate increases are meant to dampen economic demand, which in turn should bring down prices. With inflation on the decline, the Fed is stepping back from bigger increases.

Still, the central bank noted that more rate increases are on the way. Indeed, the Fed’s “dot plot” shows that the vast majority of its members see the federal-funds rate going above 5% in 2023---and staying there for the year. The central bank, using smaller rate hikes, is treading lightly.

The Fed acknowledged that already-higher rates should keep driving economic demand—and inflation—lower and the central bank made clear that it doesn’t want to put the economy into a more-than-mild recession.

But the dot plots make clear there’s a risk---if inflation remains too far above the targeted 2%---that the Fed’s work may not be over quite yet.

"Most importantly, we should be acknowledging that interest rates are going to stay high for longer and a continued adjustment that the economy and markets have to deal with,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group.

That’s why bond yields edged up on the Fed news. The two-year Treasury yield, which attempts to forecast the level of the federal-funds rate a couple years from the present, rose to 4.245% from below 4.2%. The 10-year yield was up to just over 3.5% from just under that level earlier in the day.

That pressured the stock market.

“The market had rallied all week, punctuated by a big jump in stock prices after Tuesday’s CPI inflation report, but it quickly fell once it became clear that the Fed is planning to hold rates higher for longer,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The S&P 500, before the release, was up 13% from its lowest close of the year hit in early October because investors were anticipating a dovish Fed. Instead, they got the hawkish version.

Overall, indexes remain above key levels and yields remain well below their multi-year peaks. The S&P 500, at around 4000, remains above the key 3900 level, signifying that there are still some buyers at current levels, partly because inflation is still declining and the Fed could change its tune early next year.

The Fed said: “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy.”

“With most Fed officials considering risks to be tilted to the downside, it’s fair to say they are far more worried about the economic outlook than they are willing to admit,” wrote Seema Shah, chief global strategist at Principal Asset Management.

At his news conference, Fed Chairman Jerome Powell said the central bank could soon move to even smaller rate hikes.

For the short-term, don’t be surprised to see more volatility.