NEW YORK: A gauge of global stocks rose and the US dollar and Treasury yields were lower on Wednesday (Feb 1) after the Federal Reserve raised its target interest rate by the expected 25 basis points but communicated more increases were on the horizon.
The Fed said the US economy was enjoying “modest growth” and “robust” job gains, with policymakers still “highly attentive to inflation risks” as it seeks to tighten financial conditions and reign in high prices. Markets have been pricing in the possibility of a rate cut by the Fed in the back half of the year.
On Wall Street, US stocks were choppy after the Fed announcement but rebounded to turn positive as Chair Jerome Powell began to speak.
“The key thing the Fed is focused on is wages and we are seeing wage inflation continue to ameliorate if you look at both average hourly earnings and the employment cost index which just came out, wages are beginning to soften, but they are not softening enough to get inflation down to that 2 per cent target,” said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Wellesley, Massachusetts.
“They had a very slightly dovish change in the language where they previously had talked about determining the pace of future increases and now they are talking about determining the extent of future increases.”
Investors will now closely eye comments from Fed Chair Powell for further signals on the path of the central bank’s policy.
The Dow Jones Industrial Average fell 5.45 points, or 0.02 per cent, to 34,080.59, the S&P 500 gained 30.83 points, or 0.76 per cent, to 4,107.43 and the Nasdaq Composite added 173.22 points, or 1.5 per cent, to 11,757.77.
Before the policy announcement, economic data painted a mixed picture, with a labor market that remains strong while manufacturing activity continues to weaken, showing contraction for a third straight month.
Investors have viewed a weaker labor market as a key component to bring down stubbornly high inflation.
Earnings season also continues to roll on, with Facebook owner Meta reporting earnings after the closing bell on Wednesday. Later in the week will bring earnings from names such as Apple and Amazon.
Early gains for European shares faded to close virtually unchanged ahead of the Fed statement, although industrial stocks , up 0.85 per cent, were a bright spot. On the heels of the Fed, the European Central Bank (ECB) and Bank of England will make their policy statements on Thursday, in which each is largely expected to hike by 50 basis points.
The pan-European STOXX 600 index closed down 0.03 per cent and MSCI’s gauge of stocks across the globe gained 0.81 per cent.
Data on Wednesday showed headline inflation in the euro zone moderated to 8.5 per cent in January, from 9 per cent in December, while core prices picked up to 7 per cent from 6.9 per cent, likely keeping pressure on the ECB to raise interest rates aggressively.
The dollar started February on a lower note, continuing its weakening trajectory of the previous four months. The dollar index fell 0.823 per cent, with the euro up 0.99 per cent to US$1.097.
The Japanese yen strengthened 0.94 per cent versus the greenback at 128.89 per dollar, while Sterling was last trading at $1.2378, up 0.47 per cent on the day.
US Treasury yields moved up after the statement but were still lower on the day, as benchmark 10-year notes were down 11.6 basis points to 3.413 per cent, from 3.529 per cent late on Tuesday, although the two-year yield briefly turned higher after the most recent batch of economic data.
U.S. crude recently fell 2.93 per cent to US$76.56 per barrel and Brent was at US$82.91, down 2.98 per cent on the day.
