The major domestic equity indexes end the trading day on Wednesday in negative territory after the Fed raised interest rates as expected and projected a slightly faster pace of rate hikes this year. Two more hikes are now expected by the end of this year, compared with one previously.
Raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed also removed its longstanding pledge to stimulate the economy “for some time.”
Current projections are that inflation will exceed the Fed’s 2 percent target, hitting 2.1 percent this year and remaining there through 2020.
Stocks were volatile after the statement but ended near the lows of the session, and selling was broad-based, with most S&P sector indexes closing in negative territory.
S&P financials, which tend to benefit from rising interest rates, were down 0.3 percent.
The interest-rate futures markets increased the probability that the Fed will raise rates again this year and next after the Fed’s statement.
A ruling that approved AT&T’s $85 billion deal to buy Time Warner put the spotlight on media and telecom shares, which mostly rose.
Shares of HBO channel owner Time Warner rose 1.8 percent. AT&T fell 6.2 percent, sending the S&P telecom services index down 4.5 percent.
After the bell, Comcast offered $65 billion for Twenty-First Century Fox’s media assets. Twenty-First Century Fox shares were up 0.2 percent in after-hours trading, after closing the regular session up 7.7 percent. Comcast ended the session down 0.2 percent.
Enjoy the Calm Before the Storm
By all measures, it has been a dull week so far for stocks. The S&P 500’s daily trading range has been below 0.4% while composite U.S. trading volume languishes in the low six billion shares-per-day range.
If the three central banks — Fed, ECB, BOJ — don’t shake things up this week, there’s always the chance for sharp moves on big volume with the triple witching expiration of futures and options on Friday. The Stock Trader’s Almanac notes that the chances are skewed toward a gain in stocks as the DJIA has risen on nine of the last 14 June expiries.
Fed Raises Rates as Expected
The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.
In raising its benchmark overnight lending rate, a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate above-target inflation at least through 2020.
The economy’s continuing expansion and solid job growth, rendering the language of its previous policy statements outdated.
Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank’s 2 percent target, hitting 2.1 percent this year and remaining there through 2020.
Policymakers projected a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.
They see another three rate increases next year, a pace unchanged from their previous forecast.
“The labor market has continued to strengthen … economic activity has been rising at a solid rate,” the central bank’s rate-setting Federal Open Market Committee said in its unanimous statement after the end of a two-day meeting.
“Household spending has picked up while business fixed investment has continued to grow strongly,” the Fed said.
The Fed’s short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank’s battle in recent years to return monetary policy to a normal footing.
Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as “accommodative,” with gradual rate increases likely warranted as a sturdy economy enters a 10th straight year of growth.
Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.
The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year, unchanged from policymakers’ March projections. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March.
The rate increase was in line with investors’ expectations and showed policymakers’ confidence in the economy’s growth prospects, continued low unemployment and steady inflation.
The Fed said its policy of further gradual rate increases will be “consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”
In a technical move, the central bank also decided to set the interest rate it pays banks on excess reserves – its chief tool for moderating short-term interest rates – at just below the upper level of its target range. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.
The policy statement bypassed discussion about the tensions over the Trump administration’s trade policies, including a decision two weeks ago to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico.
Individual Fed policymakers have expressed concerns about the economic risks of a broad tit-for-tat tariff retaliation but have said they would not change their policies or forecasts until those risks are realized.
Energy Pushes Up Producer Price Index
Producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, but underlying producer inflation remained moderate.
According to a report by the Labor Department released on Wednesday morning, its producer price index (PPI) for final demand rose 0.5 percent during May, due in part to a sharp rise in gasoline prices and continued gains in the cost of services. The PPI edged up 0.1 percent in April.
In the 12 months through May, the PPI increased 3.1 percent, the largest advance since January 2012. Producer prices rose 2.6 percent year-on-year in April.
The core PPI, which excludes food, energy and trade services, rose 0.1 percent last month, the same as April’s increase. For the 12-month period through May, the core PPI rose 2.6 percent after advancing 2.5 percent in April.
The renewed upward trend in producer prices strengthens expectations that inflation will pick up this year and likely breach the U.S. central bank’s 2 percent target.
Regional factory surveys have shown an acceleration in raw material prices this year. So far, manufacturers have not passed on these higher costs to consumers. A report on Tuesday showed monthly consumer prices rising moderately in May.
The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 1.8 percent year-on-year in April after a similar gain in March.
In May, prices for goods surged 1.0 percent, accounting for 60 percent of the rise in the PPI. Goods prices were unchanged in April. In May, they increased by a 9.8 percent due to the increase in the price of gasoline. Wholesale gasoline prices slipped 0.4 percent in April.
Prices for steel mill products surged 4.3 percent in May, the largest rise since February 2011, likely reflecting steel import tariffs imposed in March by the Trump administration. The cost of these products could rise further after the government this month widened the duties to steel imports from the European Union, Canada and Mexico.
Wholesale food prices edged up 0.1 percent last month after declining 1.1 percent in April. Excluding foods and energy, goods prices increased 0.3 percent, rising by the same margin for a third straight month.
The cost of services increased 0.3 percent after nudging up 0.1 percent in April. Services were driven by a 0.9 percent rise in margins for trade services.
The cost of healthcare services ticked up 0.1 percent after falling 0.2 percent in April. Those costs feed into the core PCE price index.