US stocks plunge as Federal Reserve maintains rates, dashes March cut hopes
U.S. stocks closed sharply lower on the last trading day in January after the Federal Reserve held interest rates steady while reiterating that despite progress, inflation risks remain and dashed hopes for an interest rate cut as soon as March.
The three major U.S. stock indexes were already weighed down by weakness in tech and tech-adjacent megacap stocks the day after disappointing Alphabet results. All three turned lower after the announcement and continued to gyrate lower during Fed Chair Jerome Powell’s press conference.
All three indexes notched gains for the month. As expected, the Federal Open Markets Committee (FOMC) left its key policy rate unchanged at 5.25%-5.50% against a backdrop of gradually cooling inflation and a resilient economy.
In its accompanying statement, the FOMC said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” a blow to market participants who were hoping for a quick dovish pivot.
“There were no surprises in the Fed statement,” said Oliver Pursche, senior vice president at Wealthspire Advisors, in New York. “It does appear that further rate hikes are off the table, which is a positive, but investors should continue to expect higher for longer as we’re still quite a ways away from the sort of economic data that would push the Fed to lower rates.”
The indexes continued to gyrate after Fed Chair Jerome Powell said the FOMC was confident it will be appropriate to reduce rates once it has confirmation inflation has been reined in, but effectively ruled out a March rate cut.
“The good news is we can forget about any more tightening,” said Art Hogan, chief market strategist at B. Riley Wealth in New York. “The bad news it’s ‘when’, not ‘if’, they’re going to cut rates, and that ‘when’ has been pushed out to what had been the fringes of consensus.”
According to preliminary data, the S&P 500 lost 79.82 points, or 1.62%, to end at 4,845.15 points, while the Nasdaq Composite lost 348.96 points, or 2.25%, to 15,160.94. The Dow Jones Industrial Average fell 319.91 points, or 0.83%, to 38,149.90.
Fourth quarter earnings season has shifted into overdrive, with nearly one in five companies in the S&P 500 slated to report this week.
Thus far, 176 have posted results. Of those, 80% have beaten expectations, according to LSEG.
Analysts now see aggregate fourth quarter S&P 500 earnings growth of 6.1% year-on-year, an improvement over the 4.7% forecast at the end of the quarter, per LSEG.
Alphabet Inc shares slid the day after it reported disappointing ad sales and projected an increase in capital spending to boost its artificial intelligence capabilities.
Microsoft Corp also forecast rising costs to develop new AI features, but its quarterly results beat analyst expectations. Its shares also ended the session lower.
Shares of New York Community Bancorp tumbled touching their lowest level in over two decades after posting a surprise loss and slashing its dividend.
A spate of economic indicators released on Wednesday, including fourth quarter employment costs and ADP’s employment index, suggested some easing in the labor market, viewed by the Fed as a necessary precondition for bringing inflation down to its 2% annual target.