Stocks end sharply lower as Fed leaves investors on edge

On the floor at the New York Stock Exchange as the Federal Reserve chairman Jerome Powell speaks after announcing a rate increase. Photo / AP

Stocks seesawed Wednesday but ended the day lower after Jerome Powell, chair of the Federal Reserve, dashed investors’ hopes that an end to the central bank’s rate increases may soon be over.

The S&P 500 slumped to a loss of 2.5 per cent for the day, after fluctuating between gains and losses earlier in the day as Powell spoke during an afternoon news conference about the Fed's intentions.

Stocks had started the day lower as investors braced for the Fed to raise interest rates a further 0.75 percentage points. But even as the central bank followed through on that expectation, attention was already on what the Fed might say about further interest rate increases to come.

The Fed's initial statement, released alongside its rate decision, appeared to point to a more cautious approach going forward, accounting for the large rate increases that have already happened and noting that it may still take time before the economic effect of those rate increases will be felt.

The S&P 500 rallied soon after the statement was released, climbing into positive territory. But the rebound faltered after Powell began his public comments, as he reiterated that the central bank "still has a ways to go" before it will be finished raising interest rates.

Powell said that because inflation has remained stubbornly elevated, the Fed might raise interest rates higher than previously expected. It's "very premature" to talk about pausing rate increases, he said.

Investors quickly responded, and the S&P 500 fell sharply. Trading in government bonds was similarly upended, with yields rising in the late afternoon after having fallen earlier in the day. The 2-year Treasury yield, which is sensitive to changes in Fed policy, ended 0.06 percentage points higher at 4.59 per cent.

"Woah! If you're the kid in the back asking if we are nearly there yet, and Dad says we have a ways to go, then you buckle in for a journey," said Rob Waldner, chief fixed income strategist at Invesco. "I was struck by that."

Written by: Joe Rennison

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