On Wednesday, the S&P 500 finally managed to snap out of its five-session losing streak and rallied, after the US Federal Reserve finally made its policy announcement. The central bank raised interest rates in accordance with market expectations of 75 basis points in order to fight the soaring inflation without driving the economy into a recession.
The Fed Makes its Decision
The target interest rate of the Fed went up by three-quarters of a percentage point, which is the highest increase recorded after 1994. The central bank also projected increasing unemployment and a slowing economy in the upcoming months. The announcement saw a great deal of volatility in equities, but they eventually turned higher after the press conference of Jerome Powell.
The Fed chairman said that the central bank’s next July meeting would also see a hike of about 50 or 75 basis points, but he added that the latter was not going to be common. Market analysts said that equities went up when the chairman said that an interest rate hike of 75 basis points could also be expected in the next meeting.
This is because it shows that the US Federal Reserve has woken up to the inflation issue and is ready to get aggressive in order to beat it. There was a 1% increase in the Dow Jones Industrial Average, or 303.7 points, which brought it to a close of 30,668.53. The S&P 500 climbed up by 1.46% or 54.51 points to reach 3,789.99. A 2.5% increase in the Nasdaq Composite was also recorded, which is about 270.81 points and it closed at 11,099.16.
The losing streak for five consecutive sessions was the longest that the S&P 500 had seen since January.
Investor and Analyst Expectations
In the last several days, investors had already adjusted their expectations to an interest rate hike of 75 basis points by the Fed in light of the high inflation numbers reported last Friday. Before the data, the central bank had been expected to increase the interest rate by 50 basis points. The violent and massive sell-off seen in world markets since Monday was because of this wild swing in investor and analyst expectations.
Analysts at prominent banks, such as Goldman Sachs and JP Morgan, had also changed their forecasts to a hike of 75 basis points. Equities have been under a great deal of pressure from the start of the year because of a slowdown in corporate earnings and economic activity, soaring inflation and higher borrowing costs. The S&P 500 index had also entered into bear market territory on Monday, as it fell by more than 20% from its closing high on January 3rd this year.
The economic data released earlier had also shown that retail sales in the US had also declined by 0.3% last month, while a rise of 0.2% had been predicted. This was primarily because increasing prices of gasoline prevented people from spending elsewhere and motor vehicle purchases were also hindered due to shortages in the market.