On Wednesday, US stocks fell sharply after the Fed announced another hike of 75 basis points, as expected. The Fed’s decision will bring its policy rate to a range of 3 percent to 3.25 percent, the highest level since 2008. US stocks traded higher early in the morning and then fell shortly after the Fed’s announcement. Although recovering somewhat later, the indices fell during the last hour of the session. By Wednesday’s close, the Dow was down 522 points, the S&P 500 was down 66 points and the Nasdaq was down 205 points. In Canada, the TSX fell 184 points on weakness in the energy sector.
North American stock indices struggled on Thursday as worries about higher interest rates and a possible recession in the US weighed on performance. By Thursday’s close, all four major North American indexes were down modestly, while 10-year US Treasury yields settled at 3.705 percent, their biggest one-day gain since June.
NA indices are drifting lower
In the four trading days covered in this report, the Dow lost 745 points to close at 30,077; the S&P 500 fell 115 points to 3,758, while the tech-heavy Nasdaq fell 381 points to close at 11,067. In Canada, the TSX lost 383 points to end at 19,003.
The US Federal Reserve (the Fed) implemented its third straight interest rate hike of 75 basis points
The Fed announced on Wednesday that it would raise interest rates by three-quarters of a percentage point in order to restore price stability. The decision was broadly anticipated by markets and pushed the Fed’s benchmark interest rate – up 300 basis points since the start of the year – to 3.25 percent. Along with the decision on interest rates, the Fed also released its economic forecast summary and dot chart. The Federal Open Market Committee (FOMC) expects policy rates to rise to 4.4 percent to 4.6 percent by the end of this year and next, before falling to 3.9 percent in 2024 and settling at neutral levels (a level that is neither accommodating nor restrictive) in the long run. The updated forecasts are significantly higher than the June forecast of 3.4 percent to 3.8 percent for 2022 and 2023, respectively, and 3.4 percent for 2024.
In addition, the committee expects much lower growth this year of 0.2 percent (1.7 percent forecast in June), 1.2 percent in 2023 (1.7 percent previously) and 1.7 percent in 2024 ( 1.9 percent before). Unemployment is also forecast to rise to 3.8 percent this year (3.7 percent previously forecast), 4.4 percent in 2023 and 2024, compared to its current level of 3.7 percent. Given these tightening policy stances, the Fed expects the personal consumption expenditure (PCE) price measure — its preferred measure of inflation — to average 5.4 percent this year before gradually tapering to 2.8 percent, 2.3 percent and 2.0 percent above falls next three years. PCE core inflation, which excludes volatile categories like food and energy, is expected to be 4.5 percent this year and 3.1 percent, 2.3 percent, and 2.1 percent over the next three years.
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