The Fed may have raised interest rates by 75 basis points, but what's more important is the Fed's tone. Is it still hawkish, or did it shift to a more neutral stance?
A 75-basis point rate hike was already baked in, so today's decision to raise interest rates to 3.75-4.0% didn't come as a surprise. What was surprising is how the market changed its bias from bullish to bearish.
Ahead of the Fed decision, the stock market was trading lower although the Dow Jones Industrial Average ($INDU) had just moved into positive territory. $INDU has been trading just above its 200-day moving average. The S&P 500 Index ($SPX) was facing resistance from its 100-day moving average and the Nasdaq Composite ($COMPQ) was hovering around its 20-day moving average. The U.S. 10-year Treasury Yield Index ($TNX) wasn't moving much prior to the Fed announcement, sitting just above 4%.
After the interest rate decision, the three equity indices moved higher and $TNX moved slightly lower, though not by a significant amount. The Fed's decision to raise rates and the comments we heard suggested the Fed may be taking a slightly dovish stance.
However, during Chairman Powell's press conference, equity markets pulled back and closed lower. This could be because Powell sounded more hawkish than investors expected. Powell indicated that there's still a lot of work to do and they're aware of the effects of their cumulative tightening of monetary policy. They also recognize there's a lag between its actions and impact on the economy. This was enough for the markets to take a U-turn.
What can investors expect going forward? Here's a recap of Fed Chairman Jerome Powell's comments during his press conference.
The initial reaction to the Fed's policy decision prompted a rally in the stock markets. Bonds also saw a bit of a rally, pushing yields lower. But, given that inflation is still a concern, the Fed doesn't want to make the mistake of loosening too soon. Powell stated that it's premature to think about pausing rate hikes and it'll take time before we start seeing inflation slow down.
In other words, it's not time to start celebrating just yet. The $INDU dropped below its 200-day moving average, $SPX fell below its 50-day moving average, and $COMPQ fell below its 20-day moving average. And $TNX reverted back to where it was before the rate hike decision was made.
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