U.S. stocks end mixed on Fed decision to hold interest rates steady but leave door open to more increases

What drove markets

U.S. stock indexes ended mostly higher on Wednesday after the Federal Reserve announced its decision to hold its benchmark fed-funds rate unchanged at a range of 5% to 5.25% but projected further rate rises were likely to lower inflation.

“Holding the target range steady at this meeting allows the FOMC to assess additional information and its implications for monetary policy,” the Federal Open Market Committee, or FOMC, said in a statement Wednesday.

However, the Fed’s “dot-plot” forecast showed the central bank may lift rates by another 50 basis points to a range of 5.5%-5.75%, according to the Summary of Economic Projections.

See: Fed sees hardy economy and low unemployment prolonging high inflation

“Today’s decision to pause on policy actions was consistent with recent labor market and inflation data. But with the economy proving resilient, downside risks from banking stress fading, debt limit uncertainty behind us and inflation still hovering above target, we are unsurprised that the Fed has also hinted that ‘additional policy firming’ may be warranted,” said Whitney Watson, global co-head of fixed income at Goldman Sachs Asset Management.

Treasury yields jumped following the rate announcement, with the 2-year Treasury yield
TMUBMUSD02Y,
4.683%,
the most sensitive to policy expectations, rose 1.3 basis points to 4.707% from 4.694% on Tuesday. The rate settled at its highest level since March 9, according to Dow Jones Market Data.

Chairman Jerome Powell said in a news conference that a decision about next FOMC meeting in July hasn’t yet been made, but he signaled more rate hikes may be coming later this year as “nearly all policymakers view further hikes this year appropriate.”

He also noted that a key measure of inflation remains sticky and that prior Fed forecasts for a big decline in price pressures have repeatedly been wrong.

“The Fed statement and projections were very hawkish but Powell’s presser was a bit optimistic regarding their inflation fight and non-committal for a July rate hike,” wrote Edward Moya, senior market analyst at OANDA,  in emailed commentary. “The S&P 500 recovered initial losses as traders believe the Fed is becoming a bit overly aggressive on what will be needed to get inflation all the way down.”

Traders in Fed-fund futures traders initially saw a 71.1% chance of the Federal Reserve hiking rates in July, which would bring the central bank’s benchmark rate to a range of 5.25% to 5.50%, according to the CME FedWatch Tool. However, market participants brought down their hike expectations to 64.5% as Powell’s failure to commit to July hike undercut the statement.

Anthony Saglimbene, chief market strategist at Ameriprise Financial, said Powell had to wrangle the committee to get them to agree for a pause, but also expressed through the Summary of Economic Projections and the statement that the Fed is still committed in fighting inflation.

“They threaded the needle exactly the way they needed to today,” Saglimbene told MarketWatch in a phone interview.

“We all want to see the [inflation] trend continue to go down, but I think we should recognize that in the last few months the core inflation is flatlined. And if that’s the case, they [the Fed] might have to act again,” he said. “I think the optionality that they left themselves is very important, and the market can digest that and be okay with that optionality for now.”

In U.S. economic data on Wednesday, the producer-price index showed a fall in wholesale inflation of 0.3% in May, the third drop in the past four months. Economists polled by The Wall Street Journal had forecast a 0.1% decline in the producer-price index.

A separate measure of wholesale prices that strips out volatile food and energy costs was flat last month, the government said. The increase in these so-called core prices over the past year decelerated to 2.8% from 3.3%, marking the smallest increase since February 2021.

Companies in focus

• Tesla Inc.
  TSLA,
  -0.74%
  ended 0.7% lower Wednesday after ending Tuesday’s session at their best since late September and extending their winning streak to a 13th session. Tesla also raised U.S. prices for its Model Y crossover by $250 late Tuesday.

• Nvidia Inc.‘s stock
  NVDA,
  +4.81%
  gained 4.8% after the chip giant became the seventh public U.S. company to close a trading session with a market cap above $1 trillion.

• UnitedHealth Group Inc.
  UNH,
  -6.40%
  stock fell 6.4% after executives told a Goldman Sachs investor conference on Tuesday that seniors had begun to catch up on pandemic-delayed surgeries for hips and knees, meaning rising costs for health insurers. Shares of Humana Inc.
  HUM,
  -11.24%
  fell 11.2% and Cigna Group
  CI,
  -3.11%
  declined 3.1%.

• Delta Air Lines Inc. shares
  DAL,
  +1.52%
  were up 1.5% in Wednesday action and logged their 14th straight day of gains. The summer travel season is expected to be robust.

—Jamie Chisholm contributed to the report.