Stocks Drop As Fed Leaves Investors Uncertain About Rates

Stocks seesawed on Wednesday, but eventually ended the day lower, after Jerome H. Powell, the Federal Reserve chair, dashed investors’ hopes that an end to the central bank’s rate increases may soon be over.

The S&P 500 slumped to a loss of 2.5 percent for the day, after fluctuating between gains and losses earlier as Mr. Powell spoke during an afternoon news conference about the Fed’s latest decision.

Stocks had started the day lower as investors braced for the Fed to raise interest rates a further 0.75 percentage points. The central bank followed through on that expectation, but attention quickly shifted to what the Fed was thinking about further interest rate increases to come.

The Fed’s initial statement, released alongside its rate decision, appeared to point to a more cautious approach going forward, accounting for the large rate increases that have already happened and noting that it may still take time for the economic effect of those rate increases to be felt.

The S&P 500 rallied soon after the statement was released, climbing into positive territory. But the rebound quickly became unstuck when Mr. Powell began his public comments, as he reiterated that the central bank “still has a ways to go” before it will be finished raising interest rates, and noted that because inflation has remained stubbornly elevated, interest rates may need to go higher than previously expected.

It’s “very premature” to be talking about pausing rate hikes, he said. Investors quickly responded, and the S&P 500 fell sharply. Trading in government bonds was similarly upended, with yields rising in the late afternoon after having fallen earlier in the day. The two-year Treasury yield, which is sensitive to changes in Fed policy, ended 0.06 percentage points higher at 4.59 percent.

“Woah! If you’re the kid in the back asking if we are nearly there yet and Dad says we have a ways to go then you buckle in for a journey,” said Rob Waldner, chief fixed income strategist at Invesco. “I was struck by that.”

Investors had hoped coming in to Wednesday’s meeting that a potential easing of the pace of rate increases may be on the cards.

The S&P 500 rose roughly 8 percent in October, partly on better-than-expected corporate earnings but also as some investors began to bet that a pivot to the Fed’s messaging was coming.

While Mr. Powell made statements similar to those he had in the past over the need to eventually slow interest rate increases, the takeaway for investors on Wednesday was that the Fed’s focus remains firmly on tackling inflation.

Yet some investors also questioned how clear the Fed was itself on what needs to happen to convince it to stop raising interest rates. Mr. Waldner said investors were left unsure of what the central bank would do next — unclear about how high rates would go, how long they would stay that high and what would need to happen for the Fed to alter its path. “Until we answer those questions there will be continued volatility,” he said.

Seth Carpenter, global chief economist at Morgan Stanley, speaking before Mr. Powell’s news conference, said that he was also waiting for more specificity on when the Fed may deem it appropriate to stop raising interest rates.

He noted that the Fed’s initial statement, released before Mr. Powell gave his remarks, said that the central bank was trying to get to a position where inflation would fall “over time.” Those words suggest that inflation does not have to decline back to the Fed’s target of 2 percent but perhaps only stop accelerating, as it has done in recent months.

“How clear are they in their own minds for the conditions needed to dial down hikes and eventually stop them?” Mr. Carpenter said.