S&P 500, Dow, Nasdaq surge after Fed opts for more modest interest rate hike of 25 basis points

2:54 pm: Another interest rate hike likely in March

The Federal Reserve raised interest rates by 25 basis points (bps), as expected by many analysts. Markets, at least for the moment, are thrilled. The Dow was down more than 300 points earlier this afternoon but rallied all the way up to flat at 34,086 during Jerome Powell’s press conference at 2:30 pm ET. The Nasdaq was up 181 points, 1.7%, to 11,777 and the S&P 500 climbed 32 points, 0.8%, to 4,108. 

The big question going forward is whether February marks the last rate hike, or if the Fed will elect to raise rates again next month. The FOMC statement suggests markets should default to expecting a rate increase. The statement includes the line “ongoing increases in the target range will be appropriate,” just as it has in months prior. 

Markets, though, are likely to be less fazed than in the past. The 25 bp increase follows a 50 bp hike in December and four 75 bp hikes in 2022.

“There’s set to be some fluctuation, but moving forward markets are going to largely shrug off the Fed’s hawkish tones and rate rises,” said Nigel Green of the financial advisory firm deVere Group. “Markets typically look to the future, not at the present, and will see that inflation has peaked, and the growing signs of a ‘soft landing’ for the U.S. economy as it appears that the central bank is reducing inflation without creating significant unemployment. 

12.05pm: Dow stumbles more than 300 points  

US stocks fell in noon trading as investors were jittery ahead of the Federal Reserve interest rate announcement at 2 pm EST today.  

At midday, the Dow lost 308 points to 33,778, while the S&P 500 eased 18 points at 4,058 and the tech-heavy Nasdaq slipped 34 points to 11,550.    

“The second half of the week’s action-packed schedule has provided a reason for investors to take risk off the table, as they await the Fed decision, and then the other major data that will follow on Thursday and Friday,” IG chief market analyst Chris Beauchamp said.

“A hawkish Fed and poor tech numbers on Friday would be a decent catalyst for a rout in stocks, while the bulls will be hoping for good news on which to pin a fresh rally,” he added.

Notable movers included shares of Snap Inc, which slid more than 13% after the social media company reported fourth-quarter results that fell short of expectations.

9.35am: Sluggish trading ahead of Fed’s decision

US stocks have dipped into the red at the open ahead of the Federal Reserve’s highly-anticipated interest rate hike decision due this afternoon.

Just after the market opened, the Dow Jones Industrial Average was down 214 points or 0.6% at 33,872 points, the S&P 500 dipped 13 points or 0.3% at 4,064 points, and the Nasdaq Composite was down 20 points or 0.2% at 11,564 points.

Major movers included Snap Inc, which fell more than 13% at the open on yet another round of disappointing quarterly earnings and forecast revenue declines for 1Q 2023, while Peloton Interactive Inc added 7.2% on better-than-expected results which showed the strength of its subscriptions revenue stream.

Meanwhile, US private payrolls increased less than expected in January according to the ADP National Employment report. However, the labor market may remain stronger than this data indicates with ADP chief economist Nela Richardson noting the impact of weather-related disruptions on employment during the reference week used to compile the report.

“Hiring was stronger during other weeks of the month, in line with the strength we saw late last year,” Richardson said.

9.15am: Private payrolls weak

Ahead of today’s Federal Reserve interest rate decision, and a precursor for Friday’s January non-farm payrolls report, the latest ADP report showed a 106,000 increase in US private payrolls in January, well below the consensus for 180,000.

In a quick reaction, economists at Pantheon Macro noted: “This is only the sixth iteration of the new ADP methodology, so we have no way of knowing if its apparent tendency to undershoot the official initial private payroll reading is structural or just noise. For the record, the median difference between ADP and the official number in the past five months is -39K.

“That appears to suggest a private payroll number of about 150K on Friday, but the range of ADP errors has been huge, from -176K in August to +15K in December. In short, we have nothing like enough history to evaluate the usefulness of ADP. We’re sticking to our 175K forecast for the official headline number, but we also expect job growth to slow to 100K or less by the end of the quarter, and to be close to zero in Q2.”

With less than a quarter of an hour to the US open, futures for all three major US stock indexes remained lower as investors stayed on the sidelines ahead of the FOMC meeting decision announcement.

6.30am: Investors looking to Jerome Powell for clues

Wall Street is expected to open lower as February trading gets underway, with investors anticipating the outcome of the US Federal Reserve’s first interest rate decision of the year and look to a raft of quarterly earnings reports from large tech companies. 

Futures for the Dow Jones Industrial Average (DJIA) fell 0.4% in Wednesday pre-market trading, while those for the broader S&P 500 index also shed 0.4%, and contracts for the Nasdaq-100 declined 0.3%.

The Federal Open Market Committee wraps up its two-day rate-setting meeting today with a 25 basis point (bps) hike expected, to be followed by a press conference with Fed Chair Jerome Powell that will be watched closely for clues on the future path for interest rates. 

Ahead of that, the major US indexes ended higher on Tuesday, with the DJIA closing up 1.1% at 34,086, the Nasdaq Composite adding 1.7% to 11,585, and the S&P 500 gaining 1.5% to 4,077. That took January’s gains for the Nasdaq to 10.7%, while the S&P rallied 6.2% and the Dow added 2.8%.

“After a very positive January, the start of February today marks a pivotal three days for markets that have the potential to decisively set the tone for the weeks ahead,” Deutsche Bank strategist Jim Reid commented in a morning note to clients.

“We have the Fed’s latest policy decision and Chair Powell’s press conference tonight. Then tomorrow we’ve got more policy decisions from the ECB and the BoE, an array of major earnings including Apple, Amazon and Alphabet, followed up by the US jobs report for January on Friday,” he added.

When it comes to the Fed’s decision, while a 25 bps rate hike is now widely expected by both markets and economists, anything other than that would be a massive shock, Reid noted. 

“It would also mark the first ‘normal’ sized hike since March 2022 when this hiking cycle began, before they embarked on a series of supersized hikes to swiftly get the policy rate into restrictive territory,” he said. “Given that the 25bps move is anticipated, the main focus today will instead be on any changes to forward guidance, both in the statement and from Fed Chair Powell’s press conference.”

Meanwhile, companies reporting quarterly earnings today include Facebook, Alibaba, Novartis, Accenture, and T-Mobile. Thursday sees Apple, Amazon and Alphabet releasing their latest financial statements.