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NEW YORK: A gauge of global stocks tumbled and Treasury yields shot up on Wednesday (Sep 20) after the US Federal Reserve projected another rate hike by year end and much tighter monetary policy through 2024 than previously expected to fight still too high inflation.
The US central bank held interest rates steady as expected at the end of a two-day policy meeting, but the rate-setting Federal Open Market Committee said “inflation remains elevated” and Fed Chair Jerome Powell said the Fed’s job is to lower it.
“We are committed to achieving and sustaining sufficiently restrictive policy to bring inflation down to 2 per cent over time,” Powell said at a press conference, adding that reducing inflation is likely to require a period of below trend growth.
Fed officials now see the personal consumption expenditures price index at 3.3 per cent at year end, up from June’s forecast of 3.2 per cent, and its overnight lending rate to be 5.1 per cent at the end of 2024, about 50 basis points higher than futures have projected.
“The Fed is trying to send as hawkish a signal as it possibly can. It’s just a question of whether the markets will listen to them without taking them with a grain of salt,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities in New York.
“They’re talking about higher rates for longer, but it’s really the economy that matters. And if the economy starts to soften, I don’t think these dot plot projections will actually hold up.”
The yield on two-year Treasuries, which reflect interest rate expectations, hit 17-year highs at 5.178 per cent as futures priced in the Fed’s overnight rate staying above 5 per cent through September 2024 – further out than previously projected.
The yield on the benchmark 10-year note hit 4.339 per cent, the highest since late 2007 as the yield curve between two- and 10-year notes remains firmly inverted in a harbinger of a recession ahead.
MSCI’s gauge of stocks across the globe closed down 0.49 per cent after the major US stock indices initially see-sawed on the Fed’s new projections before closing lower.
“Right now the message is we’re going to leave rates higher for longer to make sure we slay the inflation dragon. That means less rate cuts in 2024,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.
“This last leg might be a little bit more difficult, and so they’re going have to navigate the message around staying higher for longer while trying to engineer that soft landing.”
The Dow Jones Industrial Average fell 0.22 per cent, the S&P 500 lost 0.94 per cent and the Nasdaq Composite dropped 1.53 per cent.
Earlier in Europe, the pan-regional STOXX 600 index rose 0.91 per cent, while MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5 per cent and Japan’s Nikkei fell 0.7 per cent.
The Fed leads a week jammed with key central bank meetings, with policy announcements in Sweden, Switzerland, Norway, Britain and Japan all due later this week.
Sterling earlier came under pressure after data showed Britain’s high inflation rate fell unexpectedly in August, prompting speculation that the Bank of England could pause its historic run of interest rate hikes as soon as Thursday.
The dollar index rose 0.22 per cent to 105.34, with the euro down 0.17 per cent to US$1.0659.
Japan’s yen continued to face pressure, prompting a riposte from Japan’s top financial diplomat.
The yen is down 11 per cent on the dollar this year as expectations firm for US rates to stay high and Japanese rates to stay low, earlier hitting a 10-month trough of 148.17 per dollar.
Benchmark 10-year Japanese government bonds are at 0.72 per cent, but have been creeping toward the Bank of Japan’s adjusted tolerance for yields 1 per cent either side of zero.
Rising yields have kept a lid on gold prices, with spot gold last trading at US$1,930 an ounce.
Oil prices fell about 1 per cent to a one-week low the Fed stiffened its hawkish stance.
Brent crude futures for November delivery fell 81 cents, or 0.9 per cent, to settle at US$93.53 a barrel, while US West Texas Intermediate crude (WTI) for October delivery fell 92 cents, or 1.0 per cent, to settle at US$90.28.
Gold slightly pared gains after the Fed statement. US gold futures settled 0.7 per cent higher at US$1,967.10.
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