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US stocks fell and Treasury yields rose after Federal Reserve policymakers indicated they expected to raise interest rates in 2023, a year earlier than expected.
The S&P 500 benchmark fell 0.6%, driven by a decline in shares of technology companies such as Oracle, Microsoft and Facebook. The Nasdaq Composite also fell 0.6%.
The fall in the equity market accompanied a $ 21 billion sale to the Treasury market, where the yield on the ten-year benchmark rose 0.06% to 1.56%.
Among government bonds with a shorter date and more sensitive to interest rate policy, there were even larger movements. The yield on the five-year bond rose 0.09 percentage points to 0.88%, while the yield on the two-year bond briefly reached its one-year high of 0.19%.
“Just as the market was comfortable with a patient Fed and inflation considerably above target, the points plot has changed,” said Seema Shah, principal strategist at Principal Global Investors, referring to the graph showing interest rate predictions of Fed officials.
“She is OK [Fed chair Jay] Powell and other Fed spokesmen reassure markets that tightening in 2023 should not be detrimental.
The recovery of the equity market over the past year has been based in part on minimum interest rates, which the Fed has anchored at zero since the crisis began in March last year.
While U.S. central bank policymakers showed they could raise rates sooner than previously thought, they have yet to point out changes to the Fed’s $ 120 billion a month asset purchase program, which investors are starting to expect that they will shrink soon.
But markets have worried that signs of higher inflation, which Fed officials acknowledged in their economic projections released Wednesday, could force the hand of the central bank.
“Given that the only contributions from the Fed update involved higher rates, it is intuitively inferred that Treasuries are trading lower,” said Ian Lyngen, senior U.S. interest rate strategist at BMO Capital Markets.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, added that forecasting higher rates in 2023 meant that members of the Fed’s policy-making committee “are now prepared to speak out in a reduced way, so the President Powell will not be able to repeat his March / April stone month. . . We hope he only acknowledges that the discussion is underway, but that a firm decision is far away. “
The US dollar index rose 0.4% along with rising Treasury yields. The pound fell 0.4 percent against the dollar, while the euro fell 0.7 percent to $ 1.20.
European stocks ended with new records before the Fed’s decision was launched. Stoxx Europe closed down 0.2% for another all-time high, the ninth consecutive benchmark session in the entire region.
The Xetra Dax in Frankfurt rose 0.1%, while both the CAC 40 in Paris and the FTSE 100 in London rose 0.2%.
Additional reports from Siddharth Venkataramakrishnan in London
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