Market Snapshot: Dow closes down over 500 points, Nasdaq falls 1.8%, as Fed signals rates may stay higher for longer

The central bank has swiftly raised borrowing costs from near zero earlier in the year as it strives to combat inflation that is currently 8.3%, near multi-decade highs.

Investors are closely watching policy makers’ projections of monetary tightening in the so-called “dot plot” of interest rates for the rest of 2022 and the following years, which should give them a glimpse to how high they will go in the future. According to the statement, the central bankers now see a median “terminal” rate of 4.6% in 2023 but don’t see any rate cuts until 2024. 

Meanwhile,in updated forecasts, the Fed predicts the economy will grow at a meager 0.2% annual pace this year and a lackluster 1.2% next year — well below the outsized 5.7% gain in 2021. The unemployment rate, meanwhile, is forecast to rise to as high as 4.4% in 2023 and stay there through 2024.

U.S. stocks were volatile after the release, with the Dow Jones Industrial Average sliding more than 500 points, after swinging between gains and losses following the Fed’s rate decision.

Rick Rieder, BlackRock’s chief investment officer of Global Fixed Income, argued in a written comment that we heard little different today in the Fed’s statement, the press conference and the Summary of Economic Projections from what we have received in the recent memory.

“The Fed’s statement, and the Chair, told us again in a very clear way that more restraint is required, but can the system handle more restraint from here?” wrote Rieder. “Probably, and the Fed SEP suggest it will have to, but it will likely require markets to continue adjusting as they should.”

With inflation rising globally in the wake of the coronavirus pandemic, about 90 central banks have raised interest rates this year in the the broadest tightening of monetary policy for 15 years. This week alone, the Fed lifted its key rate by 75 basis points for a third time while the Bank of England is predicted to boost its benchmark by 50 basis points, and hikes are also expected in Indonesia, Norway, the Philippines, Sweden, and Switzerland, among countries.

Also suppressing sentiment on Wednesday was news that Russian president Vladimir Putin had called for a partial military mobilization of the country to prosecute his attack on Ukraine. The announcement, which included threats against the West, raised fears of a further escalation in the conflict.

Precious metals traded higher with gold for December delivery 
GCZ22,
+0.67%
 
GC00,
+0.67%
rising $4.60, or 0.3%, to settle at $1,675.70 an ounce on Comex. The ICE U.S. Dollar Index
DXY,
+1.04%,
 a measure of the currency against a basket of six major rivals, advanced 0.5% on Wednesday. 

Energy prices slumped, with U.S. WTI crude futures
CL.1,
-1.67%
down 1.2% to settle at $82.94 a barrel and the ICE Dutch TTF natural gas futures, the continent’s benchmark, down 0.6% to 193 euros per megawatt hour. The euro
EURUSD,
+0.03%
fell 0.8% to $0.9890, pushing the dollar index back near its 20-year peak.

The sharp rise in interest rates over recent months — and the prospect of more to come — has sparked a sell-off in bonds and pushed benchmark government yields
TMUBMUSD10Y,
3.530%
to 11-year highs, a move that is further pressuring stocks, partly because it makes debt assets relatively more attractive. The yield on the 2-year Treasury 
TMUBMUSD02Y,
4.039%
 also rose to the highest since Oct. 2007, according to Dow Jones Market Data. 

Correlations between Treasury yields, equities, the US dollar, and crypto are at the year’s highs, noted analysts at QCP Capital. It is “no doubt a sign that liquidity (or the withdrawal of it) is front and center as the main driver of all markets now,” the analysts said.

See: Fed’s tough task: History shows inflation takes average of 10 years to return to 2%

“Central banks are demonstrating greater resolve to fighting inflation, and increasingly willing to sacrifice growth to get there,” said Nathan Sheets, global chief economist at Citi.

In U.S. economic data, existing-home sales in the country fell 0.4% in August to 4.8 million, the lowest level since May 2020, the National Association of Realtors said Wednesday.

Companies in focus

• Shares of General Mills Inc. 
  GIS,
  +5.72%
  rose 7% Wednesday, after the branded consumer foods company, which brands include Cheerios, Betty Crocker and Häagen-Dazs, reported fiscal first-quarter profit that rose above expectations and raised its full-year outlook.

• Shares of Glatfelter Corp.
  GLT,
  -5.57%
   went down 3.3% Wednesday, after the supplier of engineered materials said it suspended its quarterly dividend, as part of a “reprioritization” of capital as it focuses its efforts on optimizing financial results. 

• Shares of defense companies were higher after Russian President Vladimir Putin mobilized more troops to Ukraine in what’s seen as a major escalation of the Ukraine war. Lockheed Martin
  LMT,
  -0.09%
  was up 2%, Northrop Grumman
  NOC,
  -0.23%
  undefined
  rose 1.9% and Raytheon
  RTX,
  -0.97%
  went up 1.7%.

• Beyond Meat Inc.
  BYND,
  -0.81%
  late Tuesday said it suspended Chief Operating Officer Doug Ramsey, who was arrested over the weekend and charged after allegedly biting a man’s nose during an altercation in Arkansas. The plant-based meat substitutes producer saw its shares up 2.4%.

— Jamie Chisholm contributed to this article.