Wall Street closes lower after Fed Chair Powell says more hikes are ahead

The Federal Reserve said Wednesday it will pause its rate hikes, keeping its benchmark lending rate at a 22-year high.

The move was widely expected, after the central bank signaled in recent weeks that it intended to wait for more data to understand how previous rate hikes are affecting the US economy. 

Since March 2022, the Fed has lifted interest rates 11 times and held them steady twice, including September's pause.

The Federal Reserve sets monetary policy with two goals in mind: price stability and maximum employment. Those two objectives are often referred to as the Fed’s “dual mandate.”

That dual mandate is relatively unique compared to many other central banks around the world. The Bank of England, Bank of Japan and European Central Bank are only charged with focusing on maintaining price stability, for example. That means that, unlike the Fed, those other central banks have just one job right now: to bring inflation down to 2%.

So why does the Fed also focus on promoting maximum employment?

The Fed’s dual mandate dates to the 1970s, when the United States was experiencing stagflation, which occurs when the economy faces both high inflation and high unemployment at the same time. In an attempt to tackle the issue, Congress amended the Federal Reserve Act in 1977, enacting some reforms to the central bank and officially giving the Fed its dual mandate.

Since then, the Fed has focused not only on keeping prices in check but also on maintaining “the highest level of employment that the economy can sustain over time,” according to a St. Louis Fed blog post.        

Economists debate whether the Fed will achieve a “soft landing” as the Fed battles persistent inflation. Based on the Fed's two priorities, a soft landing would be achieved if the central bank successfully tamps down inflation without causing a spike in unemployment or a broader recession.

"We're concerned number one with restoring price stability," Powell said. "In the long run, that's something we have to do so that we can have the kind of economy we really want, which is one with a sustained period of tight labor market conditions.”

Mortgage rates have spiked during the Fed's historic inflation-curbing campaign, sending home affordability to its lowest level in several decades. Buying a home is more expensive because of the added cost of financing the mortgage and rising home prices.

The inventory of existing homes has dramatically declined as homeowners who previously locked in lower rates are reluctant to sell. The combination of low inventory and high costs has squeezed would-be homebuyers and sent overall home sales way down.

The Fed is expected to hold its rates steady at September's meeting and has already tightened policy significantly, said Danielle Hale, chief economist at Realtor.com, in a statement in advance the Fed's meeting.

The Fed's outlook for the rest of the year — whether another hike will be needed and how long policy will need to remain restrictive — will make the most impact on mortgage rates.

"Already, the impact of tighter policy is acutely felt," she said. "Mortgage rates have steadied just below recent highs, but remain more than 3 percentage points above their pandemic-era lows."

The combined impact of higher rates and higher home prices has driven up the monthly cost of financing the typical listed home by more than $400, or 22.5%, from a year ago, and up more than $1,100 from August 2020, doubling the cost in three years, according to Realtor.com.

Despite growing divisions among Federal Reserve officials regarding future monetary policy decisions, all members voted in favor of holding interest rates steady.

Fed officials have made unanimous decisions at every meeting since July 2022. At the prior meeting, in June, Esther George, the former President of the Kansas City Fed, voted for a half point hike while all other Fed officials voted for a three-quarter point hike.

The Fed's minutes, which are due on October 11, could hint at potential division at the next meeting, which is set to take place on October 31 to November 1.

The Dow climbed nearly 250 points, or 0.7%, early Wednesday afternoon as investors await a key interest rate policy decision from the Federal Reserve.

The S&P 500 was trading 0.3% higher and the tech-heavy Nasdaq was down 0.1%.

The central bank is expected to hold interest rates steady at its 2pm policy announcement: Traders see a 99% chance that the Fed will keep rates unchanged, according to the CME FedWatch Tool.

But Wall Street is less certain about future meetings, with traders seeing a 72% chance that rates will remain the same at the November policy meeting. They will pay close attention to the Fed's "dot plot" where officials predict the path of rate hikes and inflation going forward and Fed Chair Jerome Powell's press conference for clues about what comes next.

Treasury yields, meanwhile, fell after reaching their highest level since 2007 on Tuesday. Oil prices also retreated from recent highs as traders await the Fed decision, in order to reassess energy demand going forward.

In corporate news, shares of Stellantis were up nearly 3% after the automaker announced that UAW strikes could lead to more than 300 layoffs at its plants in Ohio and Indiana.

Goldman Sachs ramped up its oil price forecasts on Wednesday, predicting Saudi Arabia’s aggressive supply cuts will lift crude into triple-digit territory.

The Wall Street now sees Brent crude, the international benchmark, averaging $100 a barrel a year from now. That’s up from $93 a barrel previously and current prices of around $94.

The forecast suggests drivers may not get any relief from high gas prices anytime soon. Lifted by a 30% surge for oil, gasoline prices have climbed to 2023 highs in recent days. Drivers in 11 states are now paying an average of $4 a gallon or higher, according to AAA.

“Significantly lower OPEC supply and higher demand more than offset significantly higher US supply,” Goldman Sachs strategists wrote in a note to clients, adding that OPEC will be able to exercise its “pricing power assertively.”

Goldman Sachs cut its 2024 average OPEC supply forecast by 900,000 barrels per day, predicting that Saudi Arabia will only “gradually” unwind its supply cuts starting in the second quarter of next year.

“Saudi Arabia appears determined to lower inventories,” the bank’s strategists said.

The good news is that Goldman Sachs argues “most of the rally is behind us” and Brent is “unlikely to sustainably exceed $105” a barrel next year.

That’s because far higher prices would incentivize more drilling by US frackers and could hurt demand.

“OPEC is unlikely to push prices to extreme levels, which would destroy its long-term residual demand,” Goldman Sachs wrote.

The bad news is that the bank says oil prices are unlikely to “sustainably drop” below $80 a barrel because of the OPEC supply cuts and shrinking emergency stockpiles in the United States.

American shoppers are keeping the US economy afloat.

Consumer spending – the main driver of growth – is still “elevated,” according to Alastair Borthwick, Bank of America’s chief financial officer.

After booming previously, spending has slowed to more “normal” levels as Fed rate hikes have the “desired effect,” Borthwick said Wednesday at a conference.

“It’s difficult to see a US recession when the consumer is spending 4% year-over-year,” he said. “The consumer is still in very good shape.”

While all eyes may be on the Federal Reserve today, they'll quickly shift to other central banks across the globe who are also meeting this week.

The Bank of England is set to meet on Thursday. The UK's Consumer Price Index reading came in on Wednesday much cooler than expected, leaving investors to believe a pause is now a more plausible scenario than another rate hike. At the BoE's last meeting, in August, it raised interest rates by a quarter point.

Also on Thursday the Bank of Japan is set to announce its decision on interest rates. In contrast to the United States and Europe, Japan's central bank is expected to keep interest rates low to stimulate the economy.

Other central banks meeting this week include the Swiss National Bank, the South African Reserve Bank, Norway's Norges Bank and the Central Bank of Brazil.

US stocks opened higher Wednesday morning as oil prices eased ahead of the Federal Reserve's interest rate decision this afternoon.

Fed officials are widely expected to hold interest rates steady at their 2pm policy announcement, and investors will pay close attention to the Summary of Economic Projections, which signals the projected path of rate hikes and inflation. They'll also watch Fed Chair Jerome Powell's press conference for clues about the Fed's way forward.

Oil prices, meanwhile, eased off of recent highs on Wednesday. Crude fell by about 1% ahead of the Fed decision as traders reassess when interest rates will hit their peak and what that means for energy demand in the United States.

In corporate news, shares of Instacart fell by 3.7% just one day after the company's public debut. The stock opened on Tuesday at $42 after pricing at $30 per share.

Shares of Pinterest spiked 5.8% after the company raised forward guidance for the year during its investor day.

The Dow was 125 points, or 0.4%, higher on Wednesday morning.

The S&P 500 was up 0.4%.

The Nasdaq Composite also gained 0.4%.