U.S. stocks fell in volatile trading Wednesday after the Federal Reserve delivered its seventh and final interest rate increase of 2022 and Chair Jerome Powell asserted in hawkish remarks that further tightening would come in the new year.
The central bank lifted its key policy rate by half a percentage point, slowing the pace from hikes of 75 basis points across the prior four meetings. The move brings the federal funds rate to a new range of 4.25% to 4.5%, the highest level since December 2007.
The S&P 500 (^GSPC) declined 0.6% after two days of gains, while the Dow Jones Industrial Average (^DJI) shed about 140 points, or 0.4%. The technology-heavy Nasdaq Composite (^IXIC) was off by 0.8%. U.S. Treasury yields held steady after a brief jump following the decision.
"Restoring price stability will likely require maintaining a restrictive policy stance for some time," Powell said in a speech following the rate announcement.
Fresh economic forecasts from the Fed that accompanied the decision show officials now see benchmark interest rates peaking at a median of 5.1% in 2023, 50 basis points higher than the previously projected 4.6% in September. Officials then see rates coming down to 4.1% in 2024, also slightly higher than previously projected.
"A downshift by the Fed was well-telegraphed so the hike was likely priced in, but some investors may have been surprised by the Fed’s fund forecast showing a more hawkish outlook than expected—a reminder that even though we may be approaching the finish line, we aren’t there yet," Mike Loewengart, head of model portfolio construction at Morgan Stanley, said in an emailed note.
"While it was good to see inflation come down these last two months, the Fed will need to see a few more signs over a longer time frame that inflation is under control before a full pivot."
The decision follows Wednesday’s closely watched November Consumer Price Index (CPI), which rose at an annual 7.1% clip last month, the second consecutive downside surprise in inflation data. Stocks closed higher following the report, but Wall Street’s reaction was underwhelming, with uncertainty still ahead around how much further rates need to go to quell prices that remain persistently high.
While a downshift in inflation was welcome on Wednesday, equity markets pared much of the gains that came immediately following the print as traders thought, “what now?,” BMO Wealth Management’s Chief Investment Strategist Yung-Yu Ma said in an emailed note.
“The Fed is still going to focus on the labor market imbalance, a dovish pivot is still a long way off, and in the meantime, companies and consumers have to recalibrate to the impact of higher interest rates and a slowing economy,” Ma added. “It’s all a balancing act, which we believe points to near-term choppy markets even though the improving inflation backdrop adds a positive bias.”
That view was echoed by other Wall Street strategists, including Bank of America Chief U.S. Economist Michael Gapen, who indicated that although November’s consumer price report reflected a faster retracement in core goods inflation than expected, services inflation remains sticky.
“It may bring up discussions of another downshift in February,” Gapen said in a note written along with his team at BofA. “We still think they go by 50 basis points given the tightness in the labor market and elevated wage growth, but the debate should be livelier especially if we get another soft December inflation report.”
Among specific movers in trading Wednesday, Sofi (SOFI) shares jumped more than 6% after a regulatory filing showed Chief Executive Officer Anthony Noto recently purchased $5 million worth of company shares.
Shares of Charter Communications (CHTR) tumbled a record one-day decline of 16% following a wave of downgrades that came after the telecom giant announced plans during its investor day to spend big in coming years on a high-speed internet upgrade — starting with $10.7 billion in 2023, more than analysts expected.
Tesla (TSLA) continued a recent downshift, falling 2.6% after a 4% slide in the previous session. Declines in Tesla on Wednesday came following a price cut from Goldman Sachs and continued selling pressure over concerns around CEO Elon Musk's management of Twitter.
Tesla's stock is down more than 18% this month and 50% year-to-date. Since closure of Musk's deal to acquire Twitter Oct. 27, the stock has cratered roughly 28%.
This week marks what is perhaps the last week of major U.S. economic events of the year for investors, with the government’s retail sales report also on the docket for Thursday. Even as a jam-packed economic calendar keeps traders busy domestically, traders will watch moves by central banks overseas, with policymakers from the U.K. Bank of England, Mexico, Norway, the Philippines, Switzerland, and Taiwan all set to carry out their own rate decisions on Thursday.
The U.K. received its own inflation reading Tuesday: A rapid rise in consumer prices decelerated slightly to 10.7% from a year earlier in November, down from a 41-year high of 11.1% during the prior month. U.K. equities retreated as investors awaited the U.S. Federal Reserve's messaging later today and the Bank of England's rate decision Thursday. The pound traded near its highest level since June.
Back on this side of the Atlantic, all eyes were also on the latest developments in cryptoworld, with former CEO of fallen cryptocurrency exchange FTX Sam Bankman-Fried facing a wave of criminal charges for his handling of customer and investor assets.
On the earnings front, companies including Lennar (LEN), Trip.com (TCOM), and Weber (WEBR) are scheduled for release on Wednesday.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc