Summary

The major domestic equity indexes closed out the trading day on Wednesday in negative territory giving up gains in choppy trading after the Fed raised interest rates, while a strong gain in the energy space helped limit losses.

The Fed forecast at least two more hikes for 2018, signaling growing confidence that tax cuts and government spending will increase the economy and inflation and lead to more aggressive future tightening.

The hike was widely expected, and new Fed Chairman Jerome Powell said in a news conference after the rate-hike announcement that the U.S. central bank was trying to take the “middle ground” in raising rates.

The financial sector index, which benefits from a higher rate environment, briefly extended gains in the wake of the announcement but lost ground to end the trading day down 0.03 percent. Indexes sensitive to higher rates such as the utility index, down 0.39 percent, and the real estate index, off 0.93 percent, were under pressure.

Stocks were choppy following the Fed announcement, as yields on the 10-year U.S. Treasury note moved closer to 3 percent, touching a one month high of 2.936 percent. Stocks have struggled this year while bond yield have moved higher.

The energy sector index rose 2.63 percent and helped lift equities for a second straight session. Crude oil prices hit a six-week high after a surprise decline in our domestic inventory and as concern persisted over possible disruption to Middle East supply.

Markets participants are still trying to decipher the number of rate hikes this year – whether the Fed will stay at three increases as previously forecast by policy makers, or whether a fourth hike is possible.

Facebook shares gained 0.74 percent to stem its recent sell-off over the past two days, which cost the social media company about $50 billion in market value.

Data misuse at Facebook raised broader questions about consumer privacy and the need for tougher regulation. The company chief executive, Mark Zuckerberg, said Facebook “made mistakes” in a statement.

General Mills fell 8.85 percent after the company cut its full-year profit forecast due to higher freight and commodity costs.

That weighed on other food companies, with Kellogg off 3.98 percent, JM Smucker ending the trading day down 4.20 percent and ConAgra falling 2.94 percent.

Southwest Airlines fell 4.79 percent after the carrier cut its forecast for a key revenue metric. Other airlines also fell, with the NYSE Arca Airline index down 1.09 percent.

Approximately 6.72 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.16 billion share average over the past 20 trading days.

Fed Raises Rates

The Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening.

In its first policy meeting under new Fed chief Jerome Powell, the Fed indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum.

The Fed also raised the estimated longer-term “neutral” rate, the level at which monetary policy neither boosts nor slows the economy, a touch, in a sign the current gradual rate hike cycle could go on longer than previously thought.

“The economic outlook has strengthened in recent months,” the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50 percent to 1.75 percent.

Powell, who took over from former Fed chief Janet Yellen in early February, said the central bank was staying on a path of gradual rate increases but needed to be on guard against inflation.

“We are trying to take the middle ground here,” Powell said in a press conference after the end of the policy meeting, adding that there were no signs the economy was on the cusp of accelerating inflation.

The rate hike was widely expected.

The equity markets rose after the policy statement before paring gains to close lower. Treasury yields fell and then recovered. The dollar recorded its steepest one-day loss in nearly two months against a basket of currencies.

The rate hike was the latest step away from years of stimulating the world’s largest economy in the wake of the 2007-2009 financial crisis and recession. The Fed tightened policy three times last year.

The combination of $1.8 trillion in expected fiscal stimulus from the Trump administration and recent hints of price and wage pressures had prompted some Fed officials to speculate more Americans could be drawn into an already tight labor market.

Some even worried inflation could rise well above the Fed’s target if the economy got too hot.

Policymakers were largely split on Wednesday as to whether a total of three or four rate hikes would be needed this year. They predicted rates would rise three times next year and two times in 2020, a further indication of their view that the economy is on solid footing.

Fed policymakers projected economic growth of 2.7 percent in 2018, an increase from the 2.5 percent forecast in December, and also marked up growth for next year. The Fed’s preferred measure of inflation was expected to end 2018 at 1.9 percent, unchanged from the previous forecast, but it is seen rising a bit above the target next year.

The unemployment rate by the end of 2018 is expected to edge down to 3.8 percent, indicating the Fed sees more room for the labor market to run. Fed officials predicted the longer-run rate would settle at 4.5 percent, slightly lower than the forecast from December.

While recent home sales and retail spending data have been on the weak side, the overall economic picture has brightened after growth accelerated to 2.3 percent last year.

Before the meeting, analysts were split over whether the Fed, which is wary of an early misstep under its new leadership, would raise policy tightening expectations until more price pressures are clearly evident. There are also looming outside risks to the economy such as a possible global trade war.

“This is a new risk (that) had been probably a low-profile risk, but which has become … a more prominent risk to the outlook,” Powell said, adding, however, that the trade tensions had not affected the Fed’s expectations for the economy.