U.S. stocks reversed earlier gains Wednesday after the Federal Reserve raised interest rates for the first time in more than three years and indicated additional tightening could follow as inflation remains above its 2% target.
By yourNEWS Media Newsroom
The Dow Jones Industrial Average fell more than 630 points Wednesday after the Federal Reserve raised its benchmark interest rate by a quarter percentage point and signaled that additional increases could be needed to bring inflation down more quickly.
Stocks had been trading higher before the Fed announcement but reversed course as investors absorbed both the unanimous rate increase and Chairman Kevin Warsh’s warning that underlying inflation has shown little improvement.
The Dow closed down 631.33 points, or 1.21%, at 51,461.78. The S&P 500 declined 33.59 points, or 0.44%, to 7,552.14, while the Nasdaq Composite slipped just 3.15 points, or 0.01%, to 25,978.43.
The Federal Open Market Committee raised its target range to 3.75% to 4%, marking its first rate increase in more than three years and the first under Warsh.
The committee approved the decision unanimously and indicated that policymakers expect further tightening as they attempt to produce a more timely return of inflation toward the central bank’s 2% objective.
“As widely expected, the Fed hiked interest rates for the first time in more than three years,” said Ryan Detrick, chief market strategist at Carson Group in Omaha. “The reality is the Fed seems unified in the fight against inflation.”
Warsh reinforced that message during his post-meeting news conference.
“So our predominant focus is on the price stability side of our mandate. Plain fact is that inflation is too high, and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” Warsh said.
The chairman also said the U.S. economy had strengthened since the Fed’s previous meeting, giving policymakers more room to address price pressures without immediately undermining overall economic activity.
“The good news is the (Fed) doesn’t think multiple hikes over the coming months will do much to dent the solid overall economy,” Detrick said. “At the same time, inflation has been above the 2% target for five years now.”
The selloff followed a stronger start to Wednesday’s session.
Before the Fed decision, all three major indexes had been advancing, aided by a rebound in semiconductor stocks and economic data showing U.S. consumers continued spending despite rising prices.
Retail sales increased 1.2% in August, their strongest gain since March and substantially more than economists had expected. Core retail sales also rose 1.4%, strengthening expectations that third-quarter economic growth remained solid even as inflation and energy costs increased.
The same resilience gave the Fed another reason to focus on inflation rather than attempting to stimulate economic activity.
Energy prices remain a major part of the inflation problem.
Crude oil has risen more than 20% during the past two and a half weeks amid the U.S.-Israeli war with Iran and disruptions to energy flows in the Middle East.
The conflict widened again Wednesday as Saudi warplanes struck Yemen while Iran-backed Houthi forces launched drones and missiles toward Saudi cities.
Oil nevertheless moved lower during the trading session after reports that Saudi Arabia was offering additional crude cargoes through Oman, reducing immediate fears about shortages.
Front-month West Texas Intermediate crude settled 3.2% lower, while Brent crude declined 2.7%.
The drop in oil prices weighed heavily on energy stocks.
Energy was the worst-performing of the S&P 500’s 11 major sectors Wednesday, falling 3%.
Chevron lost 2.9%, Exxon Mobil declined 3.5%, and Devon Energy and ConocoPhillips each fell more than 5%.
Technology was the strongest S&P 500 sector, limiting the Nasdaq’s decline to virtually zero.
Semiconductor stocks gained 0.6%, producing their first clear advance since several leading artificial-intelligence executives called for slowing the rate at which advanced AI capabilities are developed and establishing broader industry safety coordination.
Intel was among the session’s strongest individual technology stocks.
Shares jumped 4% following a report that South Korea’s SK Hynix was discussing possible memory-chip manufacturing in the United States with Intel. U.S.-listed shares of SK Hynix gained 0.6%.
Other large companies moved sharply lower for company-specific reasons.
Robinhood fell 5.5% after the Senate failed to advance broad cryptocurrency legislation supported by the digital-asset industry.
The decline also came one day after the Justice Department charged two former Robinhood engineers with insider trading and misuse of confidential information.
IBM dropped 4.4% after announcing that Anderon, its chip unit, had signed a funding agreement with the U.S. government.
Boeing shares fell 3.7% after CEO Kelly Ortberg said the company was “taking longer than expected” to stabilize production of the 737 MAX at 47 aircraft per month.
The weakness extended beyond the largest companies.
Declining stocks outnumbered advancing issues on the New York Stock Exchange by approximately 1.75 to 1, while Nasdaq decliners outnumbered gainers by about 1.48 to 1.
The NYSE recorded 76 new highs and 430 new lows. The Nasdaq recorded 51 new highs and 257 new lows.
Trading activity was also heavier than normal.
Approximately 18.42 billion shares changed hands on U.S. exchanges, compared with a 20-day full-session average of 15.33 billion shares.
Wednesday’s rate increase changes the direction of Federal Reserve policy after a multiyear period in which the central bank had gradually shifted away from the aggressive tightening campaign launched during the post-pandemic inflation surge.
The renewed increase reflects a different inflation problem, with higher oil and fuel costs adding pressure throughout the economy while consumer demand remains comparatively resilient.
Warsh made clear after the decision that the central bank’s immediate priority remains inflation.
The market reaction reflected that shift.
Stocks entered the Fed announcement in positive territory but finished broadly lower as investors moved from debating whether the central bank would raise rates to assessing how many additional increases could follow.
The Dow absorbed the largest percentage decline among the three major indexes, while strength in semiconductor shares allowed the Nasdaq to finish nearly unchanged.
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