Bonds rose after the Federal Reserve lifted interest rates for the first time since 2023 to fight persistently high inflation, boosting its credibility.
Long-dated bonds outperformed, with 30-year yields dropping from a nearly two-decade high. Stocks wavered. Brent crude slipped to around $106 as traders weighed the outlook for supplies.
The Federal Open Market Committee voted unanimously to increase the benchmark rate to a range of 3.75% to 4%. The so-called dot plot, which the US central bank uses to signal its outlook for the path of monetary policy, suggests one more hike this year.
“Today’s policy action will support a timelier return to the committee’s 2% goal,” officials said in a statement following the move Wednesday, referring to inflation.
Wednesday’s rate hike sends a message to the markets that the Fed isn’t just talking about inflation, it’s actually doing something about it, according to Alex Guiliano at Resonate Wealth Partners.
“While one 25-basis point hike isn’t likely to bring inflation down overnight, it could help to stabilize the bond market, which has a direct impact on borrowing costs,” he said.
“The Fed has finally begun its hiking cycle, and the debate now shifts from whether rates will rise again to how many hikes lie ahead,” said Seema Shah at Principal Asset Management. “The unanimous vote shows that rising energy prices and stubborn inflation have brought even the doves on board, making a one-and-done move highly unlikely.”
With markets already pricing multiple increases, policymakers will probably need to deliver at least one more hike to safeguard credibility, she added.
“Chairman Warsh and the rest of the committee are building a strong reputation through their laser focus on defeating inflation,” said Jeff Roach at LPL Financial. “Given the current economic circumstances, the committee delivered what was needed. Going forward, the inflation debate will likely center on the magnitude of improvement as geopolitical conflicts wane.”
History suggests that a transition from a prolonged pause to renewed tightening hasn’t necessarily derailed equity markets, said Adam Turnquist at LPL Financial.
Following a rate hike that ended a pause of six months or longer, the S&P 500 gained an average of 5.5% over the subsequent 12 months, he added. Across the 12 instances since 1972, the average maximum drawdown during that period was 9.4%.
(By Rita Nazareth)
