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Stocks slid in volatile session after U.S. Fed delivered another aggressive rate hike

The Federal Reserve raised rates by 75 basis points and forecast more sizable rate hikes in its fight against inflation, actions widely expected by traders.

The United States Federal Open Market Committee (FOMC) announced the decision to raise U.S. interest rates by 75 basis points, raising it to the range of 3.00-3.25% yearly.

The committee cited modest growth in production and production, as well as robust job gains, low unemployment and persistently high inflation as the main drivers of this decision.

Markets initially nose-dived after the release of the statement, in which the FOMC stated that it would continue to proceed with its balance sheet reduction as it continued to fight against inflation.

Despite the initial shock, markets seem to find some hope in the speech of FED president Jerome Powell in the press conference held after the statement release.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 per cent,” Powell told reporters in Washington following the meeting. 

Powell affirmed that “it’s very likely there’ll be some softening in the labor market”, reassuring investors that the pace of future rate increases will be data dependent and that the pace could be slowed down to assess some of its effects, driving markets higher.

However, the chairman also said that the FED seeks to return to “sufficiently restricted rates” and that the housing market may have to go through a correction, which erased most of the bounce in equities that happened during the dovish remarks.

The FED president stated that the FOMC board is split between 100-125bps rate raises for the rest of 2022. This as the board revised its expectations for unemployment in 2022 to 3.8%, up just an inch from the 3.7% rate forecasted in June. For 2023, the committee expects interest rates to stay between 4.00 and 5.00%, before gradually tapering off in 2024 and the following years.

Market Reaction

The move by the Fed was mostly baked in by U.S. investors, particularly after last month’s CPI read.  Over the month the S&P 500 is down over 8% and 18% for 2022.

By the end of the day, the S&P 500 closed -1.7% lower, at 3,789 points. All major S&P 500 sectors finished the session in negative territory, led to the downside by consumer discretionary, communication services and growth-focused companies. 

The biggest gainers of the day were stocks of consumer staples, like General Mills (GIS)Kellogg (K) and Campbell Soup (CPB), as investors flocked to inflation and recession-proof stocks. 

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