WASHINGTON — Stocks fell, giving up their gains from an early rally, and Treasury yields climbed Wednesday as investors weighed the Federal Reserve's decision to leave its key interest rate unchanged, while signaling that it plans to begin raising interest rates “soon” as the central bank moves to fight inflation.
In a statement issued after its latest policy meeting, the Fed said it “expects it will soon be appropriate” to raise rates. Though the statement didn’t specifically mention March, half the Fed’s policymakers have expressed a willingness to raise rates by then, including some members who have long favored low rates to support hiring.
The Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March.
Stock indexes initially rose, then eased back to just below where they were before the Fed's statement was released at 2:00 p.m. ET., then flipped into the red as Fed Chair Jerome Powell took repeated questions about how and when the central bank will start letting its balance sheet shrink after buying trillions of dollars of bonds through the pandemic.
Powell said several times that policy makers have not set a timetable for when it will start reducing its balance sheet and that the Fed sees short-term rates as the main lever it will use to adjust monetary policy. But he also acknowledged that the balance sheet is substantially larger than it needs to be and that the economy no longer needs to have such highly supportive action.
The S&P 500 was down 0.4% as of 3:28 p.m. Eastern. The benchmark index had been up 2.2% earlier in the day. The Dow Jones Industrial Average was down 206 points, or 0.6%, to 34,058, after having been up by more than 500 points. The Nasdaq was little changed ater after having been up 3.4% earlier in the day.
The market had been solidly higher prior to the release of the Fed statement, a turnaround following several days of volatile swings as investors try to gauge whether the Fed will succeed in its new effort to fight inflation. The central bank had been widely expected to continue drawing back its stimulus measures ahead of raising interest rates in the coming months.
Bond yields rose following the Fed's statement. The yield on the 10-year Treasury rose to 1.84% from 1.78% from late Tuesday.
Pressure from inflation on businesses and consumers is what is driving the Fed to raise interest rates this year. There was some concern on Wall Street that Powell could suggest that the central bank will raise interest rates this year more than the four times that most economists currently expect.
For nearly two years, investors had poured money into stocks, confident that the Federal Reserve would help keep share prices upright. With that support going away, markets have been hit with a bout of volatility. The S&P 500 is down 9.5% so far this year.
Markets rose following the Fed’s last policy meeting in mid-December. It wasn’t until three weeks later, in early January, that stocks turned jittery. That’s when minutes released from that meeting suggested Fed policymakers may be more zealous about fighting inflation through higher interest rates than many had been expecting.
Investors knew that higher rates were on the way, but the minutes showed that the Fed was likely to raise rates faster than in prior efforts to get rates back to normal. Perhaps more impactfully, the Fed also said it was likely to be quicker than in the past to reduce its huge holdings of bonds it had bought up through the pandemic to keep longer-term interest rates low. That would have a similar effect as additional rate increases.
The 11 sectors in the S&P 500 turned lower, with communication, health care and industrial stocks weighing down the index the most.
Strong earnings reports and financial forecasts underpinned gains for some stocks. Microsoft rose 2.1% after reporting standout results for its latest quarter on solid demand for its cloud-computing services and work software. Chipmaker Texas Instruments rose 1.5% after giving investors a solid earnings report and financial forecast.
Investors are also gauging the threat from COVID-19 and the omicron wave's impact on economic growth. The International Monetary Fund cited the omicron variant as the reason it downgraded its forecast for global economic growth this year.
Wall Street is also carefully watching the potential conflict between Russia and Ukraine, which could push energy prices higher and force nations to focus on a war just as they are trying to focus on keeping the virus pandemic in check, along with economic growth.