US stocks closed lower on Wednesday, falling after Federal Reserve chair Jay Powell cautioned that the central bank may not begin cutting interest rates soon.
The Fed on Wednesday raised its benchmark interest rate by a quarter of a percentage point to a range of 5-5.25 per cent — its tenth straight increase since early 2022 — but stressed in a statement that any further increases would be dependent on economic developments.
Wednesday’s increase was widely expected, but markets have been pricing in several cuts by the end of the year as the Fed tries to balance stubborn inflation with growing fallout in the financial sector.
The Fed’s latest statement removed previous guidance that had said additional monetary tightening “may be appropriate”. Speaking to journalists afterward, Powell said the change in language was “meaningful”, but he added that the central bank still expects inflation will take time to return to its target.
“We on the committee have a view that inflation is going to come down not so quickly . . . if that forecast is broadly right, it would not be appropriate to cut rates.”
Stocks struggled for direction during the press conference, but the broad S&P 500 stock index eventually closed 0.7 per cent lower for the day. The Nasdaq Composite — which is dominated by growth stocks that are particularly sensitive to rate expectations — fell 0.5 per cent.
The yield on the benchmark 10-year Treasury note, which falls when prices rise, dipped 0.09 percentage points to 3.35 per cent. The yield on the more policy-sensitive two-year note fell 0.12 percentage points to 3.86 per cent.
“Uncertain seems to be the phrase of the day, and I think that’s appropriate and a true reflection of where [Fed officials] do stand,” said Michael de Pass, head of linear rates trading at Citadel Securities. “When you look at all the uncertainty around the data, the debt ceiling, the bank situation, and the fact that rates are significantly above neutral . . . [they want to] try to retain as much optionality as possible.”
Wednesday’s choppy trading followed a bruising session on Tuesday, when markets were rocked by concerns about the health of the regional banking sector after the failure of troubled Californian lender First Republic. The KBW Regional Bank index initially clawed back some of its losses on Wednesday, but fell after Powell’s press conference to close down 0.9 per cent.
Regional bank PacWest dipped 2 per cent after a 28 per cent plunge in the previous session, while Western Alliance fell 4.4 per cent.
Oil prices fell further on Wednesday, following signs of cooling US and Chinese demand. Brent crude, the international benchmark, was down 4 per cent to $72.33 a barrel. US benchmark West Texas Intermediate dropped 4.3 per cent to $68.60 a barrel.
Stocks closed higher in Europe, with the pan-European Stoxx 600 climbing 0.3 per cent, Germany’s Dax up 0.6 per cent and the FTSE 100 gaining 0.2 per cent.
Traders were also preparing for the latest policy meeting of the European Central Bank on Thursday. Interest rates in the eurozone are also expected to rise by a quarter of a percentage point.
Asian stocks declined on Wednesday, dragged down by the previous day’s sell-off on Wall Street. South Korea’s Kospi declined 0.9 per cent, Hong Kong’s Hang Seng index dropped 1.3 per cent and Australia’s S&P/ASX 200 fell 1 per cent. Markets in mainland China and Japan were closed for holidays.
Additional reporting by Hudson Lockett in Hong Kong
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