The Federal Reserve raised its benchmark rate to 3.75%-4.00% on Wednesday in a unanimous vote, its first hike since 2023. Stocks fell and Treasury yields climbed as investors concluded the central bank turned more hawkish than expected, with one more increase penciled in for this year.
The Federal Reserve raised its benchmark interest rate a quarter percentage point to 3.75%-4.00% on Wednesday, its first rate hike since 2023. The move was widely expected, but the unanimous vote among Fed officials caught investors' attention after the prior meeting in July ended in a 9-to-3 decision to hold rates steady.
David Krakauer, vice president of portfolio management at Mercer Advisors, said the unanimous vote materially raises the odds of another move before year-end, and that investors positioned for an easing cycle need to recalibrate.
Stocks and yields react
The S&P 500 ended the session down 0.45% following the decision. Yields on two-year and 10-year Treasuries rose, with the benchmark 10-year yield at 5.02% late Wednesday, above the closely watched 5% level, while the dollar gained sharply against a basket of currencies.
Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, said the unanimous vote makes the Fed look independent. According to Reuters: "it adds trust to the market," he said, adding that the Fed may have come off a little too hawkish and that markets will need to watch how the economy responds in the coming months.
More hikes in view
Forecasts released Wednesday showed Fed officials expect one more rate increase this year, then holding steady through 2027. Fed funds futures late Wednesday pointed to roughly even odds of another hike at the October meeting, which falls just before the U.S. midterm elections.
The core Personal Consumption Expenditures Price Index ran at 3.3% on an annual basis in the latest reading, still above the Fed's 2% inflation target. New Fed chair Kevin Warsh's speech at Jackson Hole last month was seen as hawkish, and hotter-than-expected inflation data released last week solidified investor expectations for Wednesday's hike.
Some investors are already adjusting positions. Phil Blancato, chief market strategist at Osaic, said reducing duration and trimming small-cap exposure could make sense if the hike marks the start of a hiking cycle.
Source: Investing.com
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