Stocks moved lower Wednesday as Wall Street digested the Federal Reserve's decision to hold interest rates steady — yet forecast one more rate hike to come within 2023's final two meetings and hinted they could stay higher for longer.
Wall Street's focus on the Fed turned to what would happen in the future: whether it will return to raising borrowing costs this year, and when a rate cut could be in the cards. The central bank signaled one more hike would come before the end of the year, and it updated its forecast for the benchmark interest rate to show interest rates will now remain higher for longer than previously anticipated.
The recent soaring rally in oil prices, seen by some as a risk to the Fed's efforts to cool inflation, pulled back somewhat on Wednesday as investors weighed how its policy decision might affect economic growth and fuel demand.
In another sign of a reviving US IPO market, Klaviyo (KVYO) made its debut Wednesday, on the heels of debuts by Arm (ARM) and Instacart (CART). The marketing automation company priced its offering above range at $30 a share, for a valuation of $9.2 billion.
Elsewhere, an unexpected slowdown in UK inflation boosted the odds that the Bank of England will pause increasing interest rates after making one last hike on Thursday. The British pound dropped after the August inflation report.
Stocks close lower after Fed meeting
Stock losses accelerated into the close on Wednesday as the Federal Reserve opted not to raise interest rates at its most recent meeting but leaned toward increasing rates in a future meeting in 2023. The central bank also updated its forecast for the benchmark interest rate to show interest rates will now remain higher for longer than previously anticipated.
Powell says UAW strike could bring array of economic impacts
The United Auto Workers strike against the big three automakers could lead to wide-ranging impacts on the US economy, Fed Chair Powell said during Wednesday's press conference.
“We’ve looked back at history and it could affect economic output, hiring and inflation, but that’s really going to depend on how broad it is and how long it’s sustained for," Powell said.
The Fed chair made clear that the central bank does not have a stance on the strike one way or the other, but acknowledged that policymakers are tasked with assessing the economic fallout.
Powell added: "it also depends on how quickly production can make up for lost production. None of those things are known right now.”
Stocks lose steam after Powell says 'soft landing' isn't the baseline
Fed Chair Jerome Powell said Wednesday that a 'soft landing," where inflation cools without a widespread economic downturn, isn't the baseline for the path forward but is a “plausible outcome."
“Ultimately this may be decided by factors that are outside our control,” he added.
He said later that a soft landing was a “primary objective,” noting, “that’s what we’ve been trying to achieve for all this time.” But, he highlighted that the path to lower prices is the main focus.
“The worst thing we can do is fail to restore price stability because the record is clear on that. If you don’t restore price stability inflation comes back and you can have a long period where the economy is just very uncertain."
Stocks appeared to drop after Powell didn't commit to a soft landing being the base case. The Dow Jones Industrial Average (^DJI) rose 0.16% while the S&P 500 (^GSPC) dropped about 0.5%. Meanwhile the Nasdaq (^IXIC) slumped nearly 1.0%.
Persistent inflation isn't why the Fed is considering one more hike
The Federal Reserve is still expecting to hike interest rates one more time this year. But when asked if that's because of inflation's cooldown stalling, Fed Chair Powell offered a different reason.
"It's more about stronger economic activity, I would say." Powell said.
He added: "Broadly stronger economic activity means we have to do more with rates."
Powell has warned about the stronger than expected US economy in the past and the Fed is now projecting the economy to grow 2.1% this year up from June's 1.0 % projection. Powell was clear to highlight though that economic growth, measured by Gross Domestic or GDP, isn't a mandate of the Fed. It's merely something the Fed watches to ensure a hot economy doesn't keep prices higher.
"The heat that we see in GDP, is it really a threat to our ability to get back to 2% inflation? That's going to be the question," Powell said. "It's not a question about GDP on it's own."
The Fed, Powell said, will only be looking at GDP to "the extent" that it impacts inflation's path downward and the Fed's mandate for maximum employment.
Fed 'dot plot' shows interest rates rising once more in 2023
The Federal Reserve didn't increase the target range for its benchmark interest rate on Wednesday, but that doesn't mean it's done raising interest rates in 2023.
The fed funds rate was kept unchanged in a range of 5.25%-5.5% on Wednesday after the central bank raised rates in July by 0.25%. Along with its policy announcement, the Fed also released updated economic forecasts in its Summary of Economic Projections (SEP), including its "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future.
Fed officials still see the fed funds rate peaking at 5.6% this year, unchanged from than the Fed's previous June projection of 5.6%.
This suggests the Fed will likely raise rates by 0.25% one more time this year.
Twelve officials see more tightening this year while seven see no increases. No officials expect to see rate cuts this year.
The Fed now plans to hold interest rates at their historically high levels for longer than previously anticipated. Fed officials now see interest rates coming down to 5.1% in 2024, higher than June's outlook for rates to finish next year at 4.6%.
Fed leaves interest rates unchanged
The Federal Reserve held interest rates steady in a target range of 5.25% to 5.5% on Wednesday as markets had widely anticipated.
The central bank had previously raised rates in July by 0.25%.
Stocks trending Wednesday afternoon
IBM (IBM) stock rose more than 2% after RBC Capital Markets initiated coverage on the stock with an Outperform rating and a price target of $188, noting that investors have "misunderstood and undervalued,” IBM's role as a software company that could benefit from artificial intelligence.
Pinterest (PINS) rose more than 4% as Wall Street analysts cheered news out of Pinterest's investor day. The company said Tuesday it expects revenue growth in the mid-to-high teens in the next three to five years.
Intel (INTC) stock slipped more than 2% as the company's CFO warned that data center inventories have taken longer than expected to clear.
Marketing automation firm Klaviyo (KVYO) made it's public debut on Wednesday with a valuation of $11.3 billion. As of about 1:15 p.m. ET Klaviyo shares rose more than 15% from its IPO price of $30.
Stocks mixed ahead of Fed meeting
The tech-heavy Nasdaq slipped into the red in afternoon trading as investors awaited a highly anticipated policy decision and press conference from Federal Reserve Chair Jerome Powell.
Bank of America boosts S&P 500 year-end target
But Bank of America's head of US equity & quantitative strategy Savita Subramanian has a simple message for investors courtesy of a reggae music legend: "Don't worry, be happy," Subramanian wrote in a new note to clients on Wednesday.
Bank of America boosted its year-end target for the S&P 500 to 4,600 from 4,300 in the note. That would reflect about 3% upside from the S&P 500's current levels.
'“Recession averted” says the consensus economist, but a fresh wave of bear narratives around equities have emerged," Subramanian wrote. "The net message of our five target indicators is bullish, yielding a new 2023 year-end target of 4600, up from 4300."
Bank of America's year-end 4600 call for the S&P 500 is one of the highest among Wall Street strategists tracked by Yahoo Finance. That's a good sign, according to BofA's research.
"Stocks discount expected growth but react to surprises," Subramanian.
Based on data since 1999, BofA found the average S&P 500 year-end target at the end of August typically projects 5% gains through the end of the year. In the rare years when strategists see the benchmark index declining from it's August close, the S&P 500 has risen every time and boasts better average returns than when strategists had predicted gains for the S&P 500.
At the end of August this year, strategists S&P 500 targets suggested 2% downside. So even as the macro headwinds mount, maybe there still could be room for another surprise to the upside.