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Stocks ended the day flat on Wednesday, belying a volatile session that saw big swings as investors digested the Fed’s decision to leave rates on hold while signaling significantly more tightening than market participants expected remains in the pipeline.
“It was a bit of a Jekyll and Hyde meeting, as the Fed delivered the first pause of this tightening cycle while at the same time keeping the door wide open for up to two additional hikes this year,” said Jim Smigiel, chief investment officer at SEI, in emailed comments.
The Fed, as expected, kept the fed-funds rate at 5% to 5.25%, pausing for the first time since it began an aggressive series of hikes in March 2022 that has lifted it from near zero. But rather than pencil in one more 25 basis-point, or quarter of a percentage point, increase, the Fed’s so-called dot plot indicated that 50 basis points of tightening remains in store.
See: Fed skips June interest-rate hike, but points to two more increases this year
That sent stocks sliding and sparked a sharp runup in Treasury yields, particularly for the policy sensitive 2-year note. Yields move opposite to debt prices.
But those losses were reversed after Fed Chair Jerome Powell took the podium. Analysts homed in on Powell’s failure to commit to a July rate increase. Instead he told reporters that no decisions had been made and next month’s gathering would likely be a “live meeting.”
Powell also noted that central bankers see inflation continuing to moderate.
Overall, the performance reflected what Gregory Daco, chief economist at EY, described as “cognitive dissonance” at the Fed.
“While extreme data dependence has convinced policy makers of the need to raise the federal-funds rate by an additional 50bps (basis points), the FOMC unanimously decided to maintain the policy rate unchanged in June,” he wrote, referring to the rate-setting Federal Open Market Committee.
“But, instead of referencing a pause in the tightening cycle, Fed Chair Powell stressed the Fed was merely slowing the pace of tightening, saying the July meeting would be ‘live.’”
Daco, however, argued that a July hike is likely, noting what he suspected was a slip of the tongue by Powell, who referred to Wednesday’s policy decision as “the skip,” before adding, “I shouldn’t call it a skip.”
The remark, along with the references to July as a “live meeting” indicates a rate hike is “nearly guaranteed in July,” Daco said, and may explain how Powell “managed to ensure a unanimous vote in favor of a hold despite diverging views amongst policy makers.”
Fed-funds futures traders, meanwhile, priced in around a 60% probability of a 25 basis-point hike next month, and a roughly 12% probability of a 50 basis-point rise, according to the CME FedWatch tool.
At the closing bell, the S&P 500
SPX,
wasn’t far from where it was just before the Fed statement, ending the day up 0.1% at 4,372.59 — good enough for its highest close since April 21, 2022 as it extended its winning streak to eight sessions.
The Dow Jones Industrial Average
DJIA,
fell 232.79 points, or 0.7%, dragged down by a 6.4% tumble by UnitedHealth Group Inc.
UNH,
while the Nasdaq Composite
COMP,
gained 0.4%.
“Given the uber-hawkish tone, equity markets continue to show surprising resiliency,” Smiegel wrote. “There’s a glass-half-full feeling in equity markets at the moment and we are fading this rally as we move into the second half of the year.”
Key Words: DoubleLine’s Gundlach warns stocks are ‘exhibiting signs of a mania’
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